I read with interest the press release FINRA issued this week announcing an $11.7 million settlement with LPL, principally over what FINRA characterized as “widespread supervisory failures.” There were two things most noteworthy to me. The first, interestingly, is not the size of the monetary sanctions (a $10 million fine plus $1.7 million in restitution), but, rather, the opposite, i.e., that such inflated sanctions have become so commonplace that they are no longer remarkable. (Take a quick look at the fines that FINRA has trumpeted in its press releases in just the last few months: $1.4 million; $3.75 million; $3 million; $43.5 million; $15 million.) The second, and the point of today’s post, is something that has become increasingly evident over recent years, and that is the almost utter lack of relevance of FINRA’s Sanction Guidelines.
If you bother to read the 24-page AWC that LPL signed, you will see that it is chockfull of a variety of rule violations. In fact, there are seven enumerated sections in the “Facts and Violative Conduct” portion of the AWC, and many of those have subsections, resulting in a grand total of 17 separately described rule violations. But, there is one rule that is clearly the most prevalent. Of those 17 descriptions, fully 14 of them include a violation of NASD Rule 3010, i.e., the supervision rule. In FINRA’s Sanction Guidelines, there are two specific Guidelines that are pertinent to supervisory violations, “Deficient Written Supervisory Procedures,” and “Failure to Supervise.” Interestingly enough, the suggested range of appropriate monetary sanctions for the former is $1,000 – $25,000, and, for the latter, $5,000 – $50,000.” The question is: how does FINRA get from $25,000 or $50,000 – the high end of these ranges – to $10 million?
I acknowledge, of course, that the Sanction Guidelines are just that, merely guidelines, and are not absolutes. As FINRA expressly cautions in the Overview to the Sanction Guidelines,
These guidelines do not prescribe fixed sanctions for particular violations. Rather, they provide direction for Adjudicators in imposing sanctions consistently and fairly. The guidelines recommend ranges for sanctions and suggest factors that Adjudicators may consider in determining, for each case, where within the range the sanctions should fall or whether sanctions should be above or below the recommended range. These guidelines are not intended to be absolute. Based on the facts and circumstances presented in each case, adjudicators may impose sanctions that fall outside the ranges recommended and may consider aggravating and mitigating factors in addition to those listed in these guidelines.
I “get” the notion that “aggravating circumstances” can cause the fine in a given case to go beyond the range identified by the NAC. But, at the same time, I can only wonder how relevant is a supposed maximum of $25,000 or $50,000 fine when, as is the case with the LPL settlement, it can be exceeded by a multiple of 200 or 400. The suggested range of fines that the NAC published in the Sanction Guidelines is rendered completely meaningless if FINRA has the ability to impose a monetary sanction 400 times higher than what the NAC deemed to be the upper end of the appropriate range. It can be a frustrating experience, when negotiating a settlement with FINRA, to cite the Sanction Guidelines as support for a fine within the stated range, only to have the Enforcement lawyer ignore them, and, instead, cite some prior settled case with an exorbitant fine, many, many times the “maximum” fine listed in the Sanction Guidelines.
The real problem respondents face is that FINRA increasingly ignores the General Principle that “[d]isciplinary sanctions are remedial in nature,” that “that the sanctions imposed are not punitive but are sufficiently remedial to achieve deterrence.” Instead, FINRA relies heavily on the NAC’s statement that “[w]hen applying these principles and crafting appropriate remedial sanctions, Adjudicators also should consider firm size.” “Firm size” is explained in a footnote as follows: “Factors to consider in connection with assessing firm size are: the firm’s financial resources; the nature of the firm’s business; the number of individuals associated with the firm; the level of trading activity at the firm; other entities that the firm controls, is controlled by, or is under common control with; and the firm’s contractual relationships (such as introducing broker/clearing firm relationships).” Focusing on the first phrase – the firm’s “financial resources” – FINRA essentially pegs the fines it metes out to a respondent’s ability to pay. Thus, the greater a firm’s financial resources, i.e., the greater the ability to pay a fine, the larger the fine.
To me, this is practically the dictionary definition of punitive damages, which are damages meant to punish. We are all familiar with the obvious notion that punitive damages have to be large enough to cause pain, financial pain, to the respondent. Accordingly, for FINRA to ratchet up its monetary sanctions, in derogation of the guidelines and fine ranges published by the NAC, based on “firm size,” is to render the Sanction Guidelines, and the principles that they are meant to embody, particularly the notion that sanctions are designed to be remedial and not punitive, nothing more than a quaint reminder of the days when “disciplinary proceedings [were] remedial actions conducted in a businessman’s forum.”
 Well, maybe there is a third observation to make. The violations cited in the AWC occurred from 2007 – 2014. One can only wonder how many examinations LPL endured over that time period, and why FINRA either failed to detect any issues sooner, or failed to bring an Enforcement case sooner. Neither is recognized as a defense, but, as a matter of equity, these lapses should have had some impact on the size of the sanctions.