Securities Enforcement Trends Reflect Regulators’ Concerns for Investors

Securities regulators have stepped up enforcement to protect investors from emerging threats and evolving risks. From Reg BI to crypto to senior fraud, regulators have increased scrutiny and sanctions to punish violators and prevent future infractions.

“Restoring trust in our financial markets and institutions requires the use of robust remedies,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said recently, in congressional testimony regarding the regulator’s enforcement priorities and budget request.

“In addition to punishing wrongdoers for violations of the securities laws, our remedies must deter those violations from happening in the first place. They must be viewed as more than the cost of doing business,” he continued.

In light of regulators’ intensifying efforts, a panel of compliance and legal experts discussed enforcement priorities and methodologies during a webinar about FINRA, SEC, and state securities enforcement trends. Panelists shared lessons from recent cases and examination sweeps to help firms and their employees avoid becoming the subject of an enforcement proceeding.

Panelists included: 

  • Joseph Borg – Director, Alabama Securities Commission
  • Peggy Fox – General Counsel, RegEd
  • Susan Light – Partner, Katten Muchin Rosenman
  • Brian Rubin – Partner, Eversheds Sutherland

Highlights from their discussion are below.

FINRA imposed $103 million in fines and ordered $47 million in restitution in 2021. Fines increased 80.7 % from 2020 while restitution rose by 86.5% However, in an analysis of FINRA Disciplinary Actions, Eversheds Sutherland attorneys attributed the surge in financial sanctions largely to a single case involving a fintech firm.

FINRA fined the firm a record-setting $57 million and ordered $12.6 million in restitution. Without that case, fines were 19.3% less than in 2020 and restitution was 36.5% more than the previous year.

“For years, FINRA has been talking about restitution in addition to fines. These statistics show the importance of restitution,” Eversheds Sutherland’s Rubin said during the panel discussion about securities enforcement trends.

Eversheds Sutherland’s analysis of 2021 FINRA actions also showed that the top case issues were:

  1. Anti-money laundering
  2. Unit investment trusts
  3. Suitability
  4. Trade reporting

Another key FINRA enforcement trend from 2021, according to Rubin, was the SEC’s overturning of half of the National Adjudicatory Council decisions that it issued opinions on last year. The SEC set aside two of four decisions from FINRA’s NAC. In one of the reversals, after nine years of litigation, the SEC found FINRA had not shown that a rep acted in bad faith after a customer complained about investment recommendations.

“The reversals demonstrate the potential value in appealing NAC decisions. The SEC is not simply rubber-stamping FINRA’s findings,” Rubin said.

In looking at FINRA’s enforcement actions through the first third of 2022, Rubin observed that cases and fines lagged last year’s pace. As of the end of April, FINRA was on pace to bring 420 cases versus 569 in 2021 and to levy $39 million in fines compared with $90 million, according to Eversheds Sutherland projections.

However, FINRA typically brings more cases, and larger ones, in the fourth quarter, particularly in December, Rubin noted. So, 2022’s eventual totals will likely exceed current projections.

“We don’t expect this straight-line extrapolation to hold. We expect that it will be significantly higher,” Rubin said, adding that he did not know how this year’s totals would compare with last’s.

Issues to watch this year include AML, suitability, alternative products, and cyber security, Rubin said. Reg BI will continue to be an area of interest as well. Not only was Reg BI one of the key issues in FINRA’s 2022 Examination and Risk Monitoring Program Report, breaches of Reg BI were cited in 81 customer arbitration cases through July, according to FINRA.

Reg BI is also among the SEC’s examination priorities for 2022. The SEC has brought its first Reg BI enforcement action as well, charging a firm and five brokers with violations. But Reg BI is only one of the SEC’s enforcement priorities, according to Katten Muchin Rosenman’s Light.

“SEC Chairman [Gary] Gensler has embraced an aggressive enforcement posture, saying that this is one of the most important ways of getting its message across. Indeed, the enforcement division is the largest division of the SEC,” Light said.

And the enforcement division could become even larger as the regulator has indicated that it would like to add 100 staffers, Light noted. The SEC has already nearly doubled the size of Enforcement’s Crypto Assets and Cyber Unit this year, bringing it to 50 dedicated positions.

Crypto and cyber are among the regulator’s top priorities. In July, the SEC charged a former crypto firm manager and two others in crypto asset insider trading action. Other noteworthy SEC enforcement actions from 2022 include:

“The SEC cares about making its imprint on the areas of top priority for the investing public,” Light said. Its enforcement priorities also include the following issues:

  • Best execution;
  • Payment for order flow;
  • Finfluencers;
  • Gamification; and
  • Business-related communications.

Regarding the last issue, one firm has already agreed to pay a combined $200 million in fines to the SEC and Commodity Futures Trading Commission (CFTC) to resolve charges regarding failures by the firm and its employees to maintain and preserve written communications. And half a dozen more firms have reserved funds for similar settlements, Light said. “This has caused a bomb to go off in the industry.”

State securities regulators have also been busy with enforcement. In the most recent year, they received 5,498 complaints, initiated 5,501 investigations, and took 2,202 enforcement actions, according to statistics from the North American Securities Administrators Association (NASAA).

All told, NASAA members ordered $306 million returned to investors, fines of $42 million, and 919 years of criminal relief, according to the 2021 NASAA Enforcement Report (based on 2020 data). States also issued 4,413 license sanctions.

Borg, the director of the Alabama Securities Commission, noted that the top issues nationwide were:

  1. Promissory notes
  2. Stocks and equities
  3. Internet and social media
  4. Real estate
  5. Commodities and precious metals

“When we release updated numbers in 2022, you will see that promissory notes are going to be replaced by cryptocurrency and digital assets,” Borg said. Otherwise, the top issues will be similar.

In terms of enforcement, states mostly take administrative actions like suspensions or cease-and-desist orders. “States have a lot of authority in the administrative space,” Borg said.

States can typically bring civil actions as well, and some, such as Alabama, also have criminal authority. Regulators can also prevent bad actors from conducting business through licensing actions.

In 2020, more than 3,600 license applications were withdrawn due to state action or attention.

“When we asked questions about applications and said, ‘Are you sure you want this person on your team?’ The answer was not an answer but, ‘Never mind, we withdraw the application.’ That’s what that 3,600 means,” Borg said. “We’re looking a lot harder at these applications as they come in.”

States also imposed 801 other licensing sanctions in 2020, barring or prohibiting 281 parties and revoking the licenses of 67 parties. “We’re starting to see maybe a little laxity in the folks that are trying to do the hiring. They may be trying to get more volume than quality,” Borg said. “I”m not saying that’s true but the numbers are telling us that there is probably something wrong.”

States also reported actions against 497 registered parties, including 153 investment advisers, 115 investment adviser representatives, 110 broker-dealer firms, and 119 broker-dealer agents. “The industry can do a better job in the gatekeeper function on the front end, not leaving it all to the states to have to do,” Borg said.

Borg also highlighted states’ concerns about senior fraud. In 2021, states received 806 complaints, initiated 595 investigations, and took 290 enforcement actions. “A lot of states have increased penalties. If a senior’s involved, they’re making special rules,” Borg said.

The reason for the special treatment is simple. Every day, 10,000 people turn 65, Borg said.

“Let’s remember the age of our legislators and who our victims are,” he added. “I get calls from state legislators who go, ‘My brother got ripped off and I want you to do this …”

Borg noted that the top investment products and sales tactics in senior-related enforcement actions include:

  • Unregistered securities
  • Traditional securities
  • Commodities and precious metals
  • Variable annuities
  • Equity-indexed annuities

Senior fraud will continue to be a priority for state regulators moving forward, Borg said, along with issues such as crypto, non-fungible tokens (NFTs), and the metaverse.

For more information on the emerging issues and evolving risks that securities regulators are focusing on, view the full recording of the FINRA, SEC, and State Securities Enforcement Trends Webinar.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

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