Effective immediately: FINRA revises sanction guidelines and increases penalties for individuals

The Financial Industry Regulatory Authority (FINRA) has made amends to its Sanction Guidelines which come into immediate effect. The improvements aim to differentiate more clearly between penalties for individuals as well as different-sized firms.

Lately, we have seen a raft of movement from global regulators as they reassess regulations that hold individuals accountable for their wrongdoings. FINRA’s latest update adds another saga to tighter personal accountability regulations – it introduces revised sanctions to flush out the bad actors and firms in the industry.  

The “regulatory mission of FINRA is to protect investors and strengthen market integrity through vigorous, even-handed, and cost-effective self-regulation.” As with most things in a post-covid world, self-management examples such as working from home have dominated the way we live. It involves managing your own workload, ensuring all necessary tasks are completed to a high standard whilst following company procedures – if this isn’t followed, then the given employee may be suspended or fired. Similarly, financial markets enter an era where they are trusted to hold up their end of the bargain, meaning following the right regulations and ensuring each member of staff is also doing the same. If violated, firms could face sanctions and individual employees could face suspension or fines.

An “important facet” of FINRA’s “regulatory mission is the building of public confidence in the financial markets.” This echo messaging from the UK’s Financial Conduct Authority (FCA), which recently cited that with consumer trust in financial services, economic progression and innovation can be achieved through transparency of services. In order to build confidence and trust, FINRA has amended its Guidelines to ensure no stone is left unturned and any bad behaviour is acknowledged and penalised.

FINRA’s Guidelines – how have they changed?

The main amendments to the Guidelines are that there is now a split between individuals and firms, with separate rules for both. Additionally, there are different regulations for small and mid-size or large-size firms. The revisions carefully consider common wrongdoings that FINRA has seen committed by firms and individuals over its tenure. The newly created sanctions are a measure to deter financial crime and protect vulnerable customers and investors alike.

FINRA introduced these changes to align the Guidelines with its Enforcement program, which focuses on investigating potential violations and ensuring that disciplinary actions are brought against firms and their employees.

Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement said that “the changes to the Sanction Guidelines align the sanctions to where FINRA’s Enforcement program has evolved. The Sanction Guidelines also bolster FINRA’s mission of protecting investors by reflecting how grave violations of FINRA’s rules will result in serious sanctions.”

The changes came into force with immediate effect on 29 September 2022. With that in mind, firms are encouraged to review the changes as soon as possible and implement them across their various lines of business.

Changes to the Guidelines include:

• Removing the upper limit of fine ranges for mid-size and large-size firms, increasing penalties for violations of the rules.
• Adding new Anti-Money Laundering (AML) guidelines and penalties.
• The minimum penalty for sanctions against firms will be $5000 and $2,500 for individuals.
• Removing the limit on fines for failures in reporting or monitoring suspicious transactions.
• Introducing new ranges of fines for individuals with a view to enforcing personal accountability.  
• Revising the circumstances where a firm or a person should be suspended or expelled, following wrongdoings.

In the event of non-compliance, FINRA will assess the appropriate sanction by taking into consideration:

• Whether the firm or individual is a repeat offender
• Whether the firm or individual made illicit gains from its violation of the rules
• Whether other regulators have penalised the firm or individual for the same activity.

As is often the case, FINRA will consider each case on its merits, and firms or individuals sanctioned by FINRA will be entitled to apply to have them waivered or lowered if they are unable to pay. In the event that FINRA issues a sanction against an individual, that individual will need to pass an examination in order to continue working within the industry.

Sanctions Guidelines for AML violations for small firms

• $10,000 to $310,000 for failing to effectively monitor and report suspicious transactions.
• $10,000 to $100,000 for an inadequate AML program.
• $5,000 to $50,000 for failing to provide for independent testing, designation of responsible individuals, or training.

Sanctions Guidelines for AML violations for medium-sized or large firms

• $50,000 to no upper limit for failing to effectively monitor and report suspicious transactions.
• $20,000 to $310,000 for an inadequate AML program.
• $20,000 to $200,000 for failing to provide for independent testing, designation of responsible individuals, or training.

FINRA’s Guidelines also state that any AML violation could result in being suspended for up to two months – severe instances could lead up to a two-year suspension – this is for all firms.

Small firms could be fined up to $310,000 and medium to large businesses don’t have a limit for the following –

• Sales of unregistered securities (high volume of or recurring transactions in penny stocks)
• Failure to respond or failure to respond truthfully to requests under FINRA Rule 8210
• Best execution
• Marking the open or marking the close
• Churning, excessive trading, or switching
• Fraud, misrepresentations or material omissions of fact
• Pricing—excessive markups/markdowns and excessive commissions
• Research analysts and research reports
• Supervision—systemic supervisory failures

For individuals, fines could reach up to $100,000 as well as suspension or even expulsion.

“The improvements to the Sanction Guidelines address the more common violations committed by firms and individuals over the past years and underscore the seriousness of some violations. The NAC carefully considered the changes and agree that the recommendations should be tailored for individuals and different sizes of firms,” said Alan Lawhead, Associate General Counsel to the NAC.

For full details on the Sanctions Guidelines, please click here.

CUBE comment

FINRA’s revised guidelines are the latest in a string of regulatory amendments focusing on individual accountability. Where once regulators focussed on the organisation first, individual second – the tide is starting to change. Individuals can no longer hide behind the corporation in the event of wrongdoing – whether malicious or negligent.

The sanction amendments do make clearer distinctions between different firm sizes as well as treat individuals as separate entities to the business and hold them accountable for wrongdoings. It is likely, at least, that with these FINRA regulations in place, we can expect consumers and investors to feel more empowered when making financial decisions as it discourages firms to act wrongly e.g. participating in fraud or dishonesty, as they will be punished for it.  

Regulation by regulation, it is possible to inspire sustainable growth with consumer protection at heart. The moral of the story is to operate in a way that has the consumer’s best interest top of mind and also keep on top of regulatory updates to avoid fines or even reputational damage.

The tricky thing with new regulatory updates is that it produces extra work for compliance officers and risk management teams. That FINRA has introduced new rules with immediate effect will leave many teams battling to keep up with implementation. Compliance is complex – especially in the absence of a lead-in time – but it doesn’t have to be. With CUBE, firms can automate regulatory change management processes using AI. Shut out all the noise – the irrelevant regulations – and filter out the rules applicable to your business.

Automated Regulatory Intelligence is truly a game changer – helping you manage regulatory change all in one place.