Just a week ago, I ran a post about FINRA’s Sanction Guidelines, suggesting that they appear to have no relevance anymore, given the vast disparity between fines that FINRA is actually imposing in settled cases, on the one hand, and the supposed maximum fines described in the Sanction Guidelines, on the other. In an excellent example of fortuitous timing, just yesterday, FINRA released its new and improved version of the Sanction Guidelines (presumably not in response to my blog post). They make very interesting reading, as does the Regulatory Notice FINRA issued to announce the new Guidelines (which, by the way, are “effective immediately,” so bad news to anyone in the midst of negotiations with Enforcement over a settlement, as the price tag just jumped).
The principal purpose of the revisions was to ratchet up the available sanctions, both monetary and non-monetary, for some of the more heinous rule violations, such as fraud, misrepresentations and material omissions of fact, as well one rather less scandalous violation, unsuitable recommendations. That was hardly a surprise, and not particularly controversial, given the generally accepted view that at least the fraud-related violations are “bad,” as reflected by the heavy-handed manner with which FINRA has historically dealt with them. In addition, FINRA upped the high-end of the range of fines for each rule violation included in the Sanction Guidelines by indexing them to the Consumer Price Index, going all the way back to June 1998. Thus, for instance, the high-end of the range for the guideline for violating the supervisory rule by having deficient supervisory procedures – which I highlighted last week in the blog post – moved up from $25,000 to $37,000. Yikes, inflation!
What was more interesting to me, however, was what didn’t change, and that is the fact that FINRA sanctions are still intended to be remedial, not punitive. FINRA had the chance to excise that language from the Sanction Guidelines, obviously, but chose not to do so. So, in the “Overview” section, FINRA still employs the phrase “appropriate remedial sanctions,” and, in General Principle No. 1, still recites that “Adjudicators should . . . ensur[e] that the sanctions imposed are remedial and designed to deter future misconduct, but are not punitive.”
That hardly means, however, that the fact I observed last week – namely, that FINRA routinely imposes monetary sanctions that represent a multiple of 200 or more over the supposed high-end of the ranges specified in the Sanction Guidelines – will now stop. To the contrary, I predict that FINRA will be emboldened by the new revisions, and argue that they constitute support for ever higher fines. Frankly, I disagree with that conclusion.
Revised General Principle No. 1 has new language that clearly suggests to me that absent certain extraordinary circumstances that would trigger a fine in an amount that exceeds the high-end of a particular range by an outrageous amount, such lofty monetary sanctions should not be routine at all:
Sanctions should be more than a cost of doing business. Sanctions should be a meaningful deterrent and reflect the seriousness of the misconduct at issue. To meet this standard, certain cases may necessitate the imposition of sanctions in excess of the upper sanction guideline. For example, when the violations at issue in a particular case have widespread impact, result in significant ill-gotten gains, or result from reckless or intentional actions, Adjudicators should assess sanctions that exceed the recommended range of the guidelines.
“Widespread impact.” “Significant ill-gotten gains.” “Result from reckless or intentional actions.” While the list of these factors is preceded by the words “for example,” so they are certainly not exclusive, it is now clear what sort of circumstances should result in fines that “exceed the recommended range of the guidelines.” Happily, these circumstances are not present in all cases, or even nearly all cases. Given that, instead of resulting in a fresh avalanche of bloated fines, as (sadly) I predict will actually happen, the revisions to the Sanction Guidelines should actually result in fewer cases with fines higher than the stated high-end of the ranges. I look forward to making that argument to some FINRA Enforcement attorney; I will let you know how it goes.
Unfortunately, I imagine what will happen is that what is true today will remain true, and that is that the Sanction Guidelines, with their adorable ranges of fines, will, generally speaking, continue to be ignored by FINRA in the context of settlement negotiations. The only place, in my experience, where the fine ranges have any real application is in front of a hearing panel, because the panelists – two of whom are from the industry, representing what I have repeatedly termed the “last bastion of self regulation” – actually seem to care that the NAC bothered to impose a high-end to each range, and therefore do not easily deign to exceed it.
And that explains why, as my friend and former colleague, Brian Rubin, who does an annual arithmetic comparison of fines imposed by FINRA in settlements versus fines imposed after going to hearing, regularly reports (revealing a secret that is hardly a secret to anyone that truly practices in this area), in a surprising number of cases, one can actually do better by going to hearing than by settling. Which is pretty weird, when you think about it, given the shout-out that FINRA gives in the Overview to the Sanction Guidelines to “the broadly recognized principle that settled cases generally result in lower sanctions than fully litigated cases to provide incentives to settle.” Perhaps the solution is to encourage FINRA Enforcement lawyers to find a nice, comfy chair and curl up with the Sanction Guidelines this weekend, and reacquaint themselves with its contents, which the NAC worked so hard to prepare.
 Curiously, FINRA does not even mention the word “remedial” anywhere in Regulatory Notice 15-15, and even seems to go out of its way to avoid it. Consider the language used in the following sentence, which is largely lifted directly from the Overview section and General Principle No. 1, and notice what adjective has been omitted: “[T]he central idea contained in the Sanction Guidelines is that adjudicators start with a range of appropriate sanctions for a particular violation and consider aggravating and mitigating factors in order to arrive at an appropriate sanction for the particular circumstances.” Seems to me that the correct phrase FINRA should have used is “appropriately remedial sanction.”