Eversheds Sutherland study finds FINRA sanctions surged in 2021; Reg BI poised for emerging enforcement focus

By Lene Powell, J.D.

A new analysis of FINRA disciplinary actions by Eversheds Sutherland shows a 60 percent increase in overall fines by FINRA in 2021, largely driven by a record-setting $57 million fine for Robinhood Financial. Restitution was also up 96 percent, while the number of cases remained mostly flat. The year also saw two rare reversals of FINRA disciplinary rulings by the SEC and a continued strong focus on anti-money-laundering enforcement.

Looking forward, partners Brian L. Rubin and Adam C. Pollet foresee an upcoming focus on Regulation Best Interest. Rubin expects that FINRA will likely bring its first Reg Bi enforcement cases this year.

Overall trends. The firm’s annual review of FINRA’s monthly disciplinary reports, press releases and online database showed that the amount of total monetary sanctions (fines, restitution and disgorgement) in 2021 were $144 million. This is a 53 percent increase from the $94 million in total sanctions ordered in 2020, and the highest total sanctions amount since 2017.

• Total reported fines were $91 million in 2021, up from $57 million in 2020—a 60 percent increase. This is the highest overall amount since 2016, which saw $174 million in fines.
• But the dramatic increase was fueled by a record-setting fine of $57 million in the Robinhood case. Without that, 2021 fines would have been $34 million—a decline of more than 40 percent.
• FINRA ordered $49 million in restitution, an increase of 96 percent from $25 million in 2020. Ten “supersized” restitution orders (more than $1 million) totaling nearly $42 million helped propel this growth. In one case, the restitution was approximately $12.6 million.
• The number of cases remained mostly flat. FINRA reported 569 disciplinary actions in 2021, a small decrease from 602 in 2020 and 591 in 2019.

Anti-money-laundering continues to lead. For the sixth consecutive year, anti-money laundering (AML) cases resulted in the most fines assessed by FINRA. FINRA reported 16 AML cases in 2021 resulting in $4.6 million in fines, compared with 14 cases totaling $16.2 million in 2020.

In Intesa Sanpaolo IMI Securities Corp., the largest case in which AML was the focus, FINRA found that the firm failed to reasonably surveil potentially suspicious activity relating to low-priced securities transactions. Among other shortcomings, the firm failed to review more than 560,000 electronic communications over almost four years. The firm agreed to be censured and pay a $650,000 fine.

By type of matter, FINRA issued the below sanctions in 2021:

1. Anti-Money Laundering—16 cases resulting in $4.6 million in fines
2. Unit Investment Trust (UIT)—five cases resulting in $3.9 million in fines and $10.9 million in restitution
3. Suitability—54 cases resulting in $3.9 million in fines
4. Trade Reporting—nine trade reporting cases resulting in $3.4 million in fines
5. Municipal Securities—seven municipal securities cases resulting in $3 million in fines

Record-setting “mega” sanctions for Robinhood. FINRA ordered Robinhood Financial LLC to pay $57 million in fines and $12.6 million in restitution for alleged systemic supervisory failures resulting in significant harm for millions of customers. Robinhood is a FinTech firm and introducing broker-dealer that provides commission-free trading to retail customers through its website and mobile applications.

FINRA alleged that Robinhood engaged in the following misconduct, among other violations:

• Distributed false and misleading information to customers. For example, Robinhood falsely told customers that they would “never lose more than the premium paid to enter [a] debit spread.” In fact, customers could lose vastly more, and many did.
• Failed to exercise due diligence before approving options accounts. Robinhood relied on flawed computer algorithms to approve options accounts, with only limited oversight by firm principals.
• Failed to supervise technology critical to providing customers with core broker-dealer services. Robinhood outsourced the operation and maintenance of its technology to its parent company, Robinhood Markets, Inc., which is not a FINRA member firm. The firm experienced outages and critical systems failures between 2018 and 2020, causing a breakdown of basic services like order entry and execution.

SEC reversals. The SEC issued four opinions on appeals from FINRA’s National Adjudicatory Council (NAC). In “atypical fashion,” the Commission set aside the findings in two. Such reversals are rare, the attorneys noted.

In one case, the SEC completely set aside FINRA’s findings of liability after nine years of litigation, finding that FINRA had not shown that registered representative (RR) David B. Tysk acted in bad faith. Tysk was represented by Eversheds Sutherland.

“The SEC’s setting aside one-half of the NAC’s cases in 2021 demonstrates the potential value in appealing NAC decisions,” said Pollet. “The SEC has made clear that it isn’t rubber-stamping FINRA’s findings, but rather giving them a hard look.”

Reg BI upcoming focus. Turning to the future, FINRA is likely to start enforcing Reg BI compliance. While it has not brought any cases in this area so far, FINRA has included Reg BI and Form CRS in its examination and risk monitoring report for the past two years. The 2022 report highlighted firms’ deficiencies regarding Reg BI and Form CRS.

Some Form CRS deficiencies identified by FINRA could indicate basic misunderstanding of Reg BI requirements, including misconstruing the obligation to file Form CRS. For example, one category of errors involved incorrectly determining that a firm did not need to file Form CRS because it did not provide recommendations. Another claimed that a firm was not subject to the Form CRS delivery obligation because of characteristics of their customer base, (e.g., retail investors who are high-net-worth individuals) or the services they offer (e.g., investment company products held directly by an issuer, self-directed accounts).

However, in emailed comments, partner Issa J. Hanna said that in the firm’s experience, by and large firms are aware of and understand their obligations and have undertaken good faith efforts to comply. He noted that while the FINRA Exam Priorities Letter points out Form CRS issues as common deficiencies, FINRA does not necessarily quantify the number of firms with these issues. Further, the number of firms sanctioned by the SEC for Form CRS filing and delivery issues so far is a distinct minority of all registrants.

“The Form CRS is a brand new disclosure requirement and compliance with it can be deceptively complex,” said Hanna. “It’s only natural under these circumstances that at least a small portion of the regulated community is going to misunderstand the requirement and when it applies. But again, in our experience, firms by and large are aware of and understand their obligations and have undertaken good faith efforts to comply.”

Pollet cautioned that FINRA will likely start looking even closer at Reg BI compliance. “We anticipate that the examiners will take a deeper dive than they have been doing.”

Rubin warned that the grace period for “good faith efforts” may be nearing an end.

“During the first year or so, firms were told that regulators were looking for ‘good faith compliance.’ We expect that the SEC will continue to bring enforcement actions and that FINRA will like bring its first Reg BI-related enforcement cases this year,” said Rubin.

As to what form enforcement will take, Rubin said that if FINRA finds the same concerns at a number of firms, they will likely perform sweep exams, as they have in the past with regard to other substantive areas. This would echo the SEC’s approach in undertaking two enforcement sweeps on Form CRS.

As a result, the attorneys have a recommendation:

“Firms may want to carefully review FINRA’s findings, as well as those cited by the North American Securities Administrators Association (NASAA), or they may find themselves on the receiving end of a FINRA enforcement action.”