FINRA brought its first Better Interest enforcement action in 2022, but it is already among the top five issues for the brokerage regulator. according to a new study by Eversheds Sutherland.
Cases related to Reg BI brought the fourth-highest amount of fines in 2023, according to the law firm's annual assessment of FINRA data. FINRA reported 15 Reg BI cases in 2023, totaling $6 million in fines (including a $5.5 million penalty to LPL Financial).
There is no sign that the pace of cases related to Reg BI will slow, according to Brian Rubin, a partner at Eversheds Sutherland, who co-authored the analysis.
“Indeed, because FINRA is the primary regulator for broker/dealers, we expect that as FINRA expands its Reg BI examinations and investigations, we will see a corresponding decrease in the role played by the SEC,” he said.
Adam Pollet, a partner with the firm and co-author of the report, said WealthManagement.com, that FINRA acts as the day-to-day regulator for b/ds, with more routine and risk-based examinations in that space compared to the SEC. As such, it would make sense that over time, Reg BI would show up more in FINRA's actions and less in the SEC's, he surmised.
The issue that raised the most fines for FINRA in 2023 was fraud, mostly due to a giant $24 million fine against Bank of America. In that case, investigators learned that two former traders involved in 717 cases of defrauding U.S. Treasury secondary markets between October 2014 and February 2021. There was only one other fraud case last year, but the combined total marked the the first that fraud appeared at the top of Eversheds Sutherland five.
Cases related to trade reporting ranked second; FINRA reported 14 such cases last year, with a total of $20 million in fines. Anti-money laundering and bank secrecy law violations came in third, with 13 related cases last year and a total of $8 million (mostly due to a $6 million judgment against Merrill Lynch). These cases held the top spot for six years in Eversheds Sutherland's annual list before dropping off the list entirely last year.
Reg BI-related cases held fourth place, while eligibility cases rounded out the top five, with $5 million in fines (although there were 33 eligibility cases last year, more than any other issue on the top five list).
FINRA fines and penalties rose 63% to $89 million in 2023 from $54.5 million in 2022. However, Bank of America's $24 million fine skews this increase; According to Rubin and Pollet, if that penalty were removed, the increase would be 19%, not 63%.
Large fines also increased, with 14 fines of $1 million or more in 2023, compared with 11 in 2022. There were four fines of more than $5 million last year, two more than the year before.
However, Rubin and Pollet found that compensation ordered by FINRA fell 66% from 2022 (from $21 million to $7 million). This paralleled the decline in large return orders; in 2023, only one firm had to pay $1 million, while last year, three firms were required to pay $17 million in damages (in 2021, ten firms had to pay a total of $42 million).
Although the amount of fines increased, Rubin and Pollet found that the number of disciplinary actions and restitution orders continued its multi-year decline. FINRA reported 453 disciplinary actions in 2023, a 9% decrease from 496 in 2022 and a 13% decrease from 2021, when FINRA reported 569 actions. FINRA cases have steadily declined since 2015, in which FINRA reported 1,344 actions.
Pollet believed that these gradual declines since 2015 were largely due to Robert Cook's tenure as FINRA CEO. He expected the number of actions to decrease in the current range.
“This is consistent with his leadership of FINRA and listening to some of the industry's concerns and responding to them,” Pollet said. “You're seeing this game in action.”