December 9, 2019

December 09, 2019

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Financial Industry Regulatory Authority Updates Its Sanction Guidelines

Earlier this month, FINRA announced changes to its Sanction Guidelines through Notice to Members 17-13. FINRA’s Sanction Guidelines are used by FINRA disciplinary hearing panels to decide what, if any, sanctions to impose in those enforcement actions in which a rule violation is found. FINRA enforcement staff and members of the defense bar utilize the guidelines in settlement negotiations.

These revisions resulted from a review of the existing guidelines by FINRA’s National Adjudicatory Council to ensure that the guidelines “reflect recent developments in the disciplinary process, comport with changes in FINRA’s rules, and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings. It has been several years since FINRA has embarked on a comprehensive review of the Sanctions Guidelines.

The Guidelines have been modified in five key areas:

First, FINRA added a new “principal consideration” to be considered in every violation: whether or not undue influence was exercised over a customer. This new consideration demonstrates FINRA’s heightened priority in combating undue influence over investors, especially senior investors, as reflected in its 2017 Priorities Letter issued in January.

Second, the update introduces a new guideline addressing systemic and firm-wide supervisory failures. While the current guidelines addressing supervisory violations focus only on supervisory failures related to an individual or a small number of individuals, the new guidelines seek to address issues arising from a systemic failure to properly supervise.

Third, a new short interest reporting guideline has been added that takes into account short interest reporting’s unique factors and sets forth appropriate principal considerations tailored to this specific situation. This will assist adjudicators in appropriately fashioning sanctions for this specific activity, as previously adjudicators were forced to use the guidelines related to short sale violations to determine sanctions for short interest reporting.

Fourth, the updates establish another new guideline addressing borrowing from or lending to customers. While FINRA-litigated cases had previously involved this type of behavior, there had been no specific guidelines within the Sanction Guidelines to address this issue. This new guideline provides guidance to adjudicators on the appropriate sanctions when encountering this type of activity.

Finally, the updated Sanction Guidelines establishes a new general principle, General Principle No. 7, which directs adjudicators to take into account regulator- or firm-imposed sanctions and corrective action as a mitigating factor when determining appropriate sanctions. This is good news for firms whose sanction levels can be alleviated by their decision to take internal corrective action.

FINRA believes that the updates facilitate more consistent and standardized sanctions for firms and individuals who may have violated FINRA rules. Significantly, the new Guidelines are applicable to pending cases. In Notice to Member 17-13, FINRA states that additional reviews of the Sanctions Guidelines are underway.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Jeff Kern, Business Trial and White Collar Attorney, Sheppard Mullin,
Special Counsel

Jeff Kern is a special counsel in the Government Contracts, Investigations, and International Trade Practice Group in the firm's New York and Los Angeles offices.  He is admitted to practice in New York and Massachusetts.

Areas of Practice

Mr. Kern's practice encompasses securities regulation, compliance, and litigation as well as internal investigations and white collar defense.  He represents broker-dealers and associated individuals who are the focus of SEC, FINRA and other regulatory investigations and provides guidance in the FINRA membership application...

212-634-3075
Associate

Julie Bauman is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's San Francisco office.

  • J.D., University of Southern California, 2015, order of the coif

  • B.A., University of California, Los Angeles, 2009, cum laude

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