FINRA recently released updated and revised Sanction Guidelines and an accompanying Regulatory Notice that, among other things, call for stricter penalties against broker-dealers who commit fraud or violate suitability rules. The revisions are effective as of May 12, 2015.

The Sanction Guidelines, first published in 1993, are intended to assist FINRA’s adjudicators in determining the appropriate disciplinary penalties for violations of the FINRA rules. Rather than provide predetermined or fixed sanctions for particular violations, the Sanction Guidelines provide a suggested range of penalties for such violations and allow adjudicators to consider various factors in determining the appropriate penalty. The Sanction Guidelines provide members and associated persons with an understanding of the sanctions associated with particular violations, thereby facilitating settlements.

The May 2015 Sanction Guidelines include significant revisions to the recommended sanctions associated with fraud and material misrepresentations or omissions and violations of FINRA’s suitability rule. The revised Sanction Guidelines related to fraudulent conduct recommend that:

  • Adjudicators “strongly consider” barring an individual from the securities industry for engaging in intentional or reckless fraud, absent mitigating factors, where the former guidelines recommended that such a sanction merely be “considered;”
  • Adjudicators “strongly consider” expelling a firm for engaging in fraudulent conduct if aggravating factors “predominate the firm’s misconduct;” and
  • The suggested period of suspension for individuals who make negligent misrepresentations or material omissions of fact be between 31 days and two years.

The revised Sanction Guidelines related to violations of the suitability rule recommend that:

  • Adjudicators “strongly consider” barring an individual from the securities industry for making unsuitable recommendations when aggravating factors “predominate the respondent’s misconduct;”
  • Adjudicators consider suspending a firm that violates the suitability rule to a limited set of activities for up to 90 days and to “strongly consider” suspending all activities of, or expelling, a firm if the violation of the suitability rule is “egregious;”
  • The suggested maximum period of suspension for individuals violating the suitability rule, absent aggravating factors, be increased from one year to two years; and
  • The suggested maximum monetary sanctions for individuals violating the suitability rule, absent aggravating factors, be increased to $110,000.

The revised Sanction Guidelines also amend the “General Principals Applicable to All Sanction Determinations” by reinforcing FINRA’s emphasis that sanctions should be “significant enough to achieve deterrence, and not a mere cost of doing business.”  Adjudicators also are advised to consider sanctions in excess of the recommended range when a party’s “misconduct has widespread impact, is intentional or results in significant ill-gotten gains.” With regard to repeat offenders, adjudicators are encouraged to impose “progressively escalating sanctions” which may be greater than the sanctions otherwise recommended.

In crafting appropriate sanctions, FINRA’s adjudicators use the Sanction Guidelines as a starting point and apply certain aggravating and mitigating factors to determine the appropriate sanction for each particular case.

Aggravating factors can include:

  • Prior disciplinary history;
  • A pattern of misconduct, or misconduct over an extended period of time;
  • Ignoring red flags, or warnings from regulators; and
  • Attempts to delay FINRA’s investigation, to conceal information or to provide misleading testimony or documentary information.

Mitigating factors can include:

  • Acceptance of responsibility;
  • Provision of substantial assistance to FINRA in its examination and/or investigation of the underlying misconduct;
  • Demonstration that the misconduct at issue was aberrant or not otherwise reflective of the firm’s historical compliance record; and
  • Reasonable reliance on competent legal or accounting advice.

Regulated persons can expect that under the new Sanction Guidelines the trend of increasingly high penalties for regulatory infractions will continue, if not accelerate.