Reed Smith Client Alerts

Authors: Daniel Z. Herbst

On May 12, 2015, the Financial Industry Regulatory Authority's (FINRA’s) National Adjudicatory Council (NAC)1 released updated Sanction Guidelines for use in adjudicating disciplinary proceedings involving FINRA member firms and associated brokers. The updated Sanction Guidelines follow the NAC’s decision to review existing disciplinary guidelines and generally provide for tougher sanctions for violations of FINRA rules. FINRA explained that the Guidelines “harmonize the Sanction Guidelines with the current state of the cases in this area,” but are not meant to prescribe fixed sanctions for particular violations.

Highlights of the updated Sanction Guidelines include:

  • Guiding Considerations Focusing on Deterrence and Investor Protection
    The Sanction Guidelines outline the “general principles” for adjudicators in taking disciplinary action against rule violators. Although the considerations serving as the basis for sanctions remain relatively consistent with prior versions of the Sanction Guidelines, the updates affirm that “FINRA's disciplinary system should be designed to protect the investing public, deter misconduct and uphold high standards of business conduct,” and generally propose harsher sanctions, by, among other things, (1) establishing lower standards for imposing suspensions, censures, and bars, and (2) recommending increased monetary penalties.
  • “Escalating” Sanctions for Recidivists
    The updated guidelines reiterate FINRA’s position that recidivists should be subject to more severe sanctions in disciplinary proceedings, and impose “escalating” sanctions on firms and individuals “that engage in a pattern of similar misconduct or evidence a reckless disregard for regulatory requirements, investor protection or market integrity.” The guidelines provide that “[a]djudicators should always consider a respondent’s relevant disciplinary history in determining sanctions and should ordinarily impose progressively escalating sanctions on recidivists.”
  • Tougher Sanctions for Fraud
    The updated guidelines increase recommended sanctions for member firms and registered representatives found to have engaged in fraud, misrepresentations or material omissions of fact. For intentional or reckless fraud by firms or individuals, the amended guidelines eliminate the guidance that adjudicators should “consider” a suspension, bar, or firm expulsion in egregious cases. The updated guidelines now provide that adjudicators should “strongly consider” barring an individual unless mitigating factors predominate, and should “consider” suspending a firm up to two years unless aggravating factors predominate, in which case the adjudicator should “strongly consider” expulsion. The Sanction Guidelines also advise adjudicators to suspend an individual for 31 calendar days to two years for negligent misrepresentations or material omissions of fact.
  • Tougher Sanctions for Suitability Rule Violations
    The guidelines also escalate the range of non-monetary sanctions for violations of FINRA’s suitability rule. For unsuitable recommendations by individual respondents, the Sanction Guidelines increase the high end of the suspension from one year to two years. The updated sanction guideline for suitability violations also advises adjudicators to “strongly consider” barring an individual respondent where aggravating factors predominate the respondent’s misconduct. When the unsuitable recommendations involve a firm, the revised sanction guideline advises adjudicators to consider suspending a firm for a limited set of activities for up to 90 days, and in egregious cases, to “strongly consider” suspending a firm for any or all activities for longer than 90 days, or ordering expulsion.
  • Significant Penalties Tied to CPI
    The updated Sanction Guidelines encourage adjudicators to index high-end monetary penalties to the Consumer Price Index. The recommended range for low-end monetary penalties remains unchanged.

Commentary In a speech in late 2014, Commissioner Kara Stein of the U.S. Securities and Exchange Commission remarked that FINRA's penalties were “too often financially insignificant” for wrongdoers. Thereafter, the NAC undertook a review of FINRA’s disciplinary sanctions and focused on consistency and the continued use of sanctions to punish and deter broker misconduct to protect investors.

By their terms, the updated Sanction Guidelines become immediately effective and applicable to all disciplinary matters, including pending matters, raising potential retroactivity challenges. Additionally, these guidelines serve as a baseline for FINRA’s Enforcement Department in negotiating settlements. Accordingly, member firms should expect more aggressive sanctions demands from enforcement staff. The fundamentals of robust policies and procedures, as well as supervision and compliance systems, remain critical to avoiding enforcement in light of the new harsher disciplinary sanctions regime.

  1. The NAC is FINRA’s appellate tribunal for disciplinary cases. It is a 14-member committee composed of industry and non-industry members.


Client Alert 2015-130