Remember a few weeks ago? Remember I blogged about Robert Cook, FINRA’s new CEO?  And how he was saying all the right things about FINRA perhaps being juuuuust a bit too Enforcement oriented?  I expressed hope – sincere but wary hope – that given his remarks, it was possible that the pendulum might actually start swinging back in a more reasonable direction.  Well, I just saw FINRA’s changes to the Sanction Guidelines, and suffice it to say that my wariness was justified, by and large.

By way of background first, these modifications to the Sanction Guidelines are part of an on-going process to keep them updated. As FINRA put it in the Regulatory Notice announcing these new tweaks,

FINRA initiates periodic reviews of the Sanction Guidelines through the NAC to ensure that the Sanction 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. The revisions discussed in this Notice are the result of FINRA’s most recent review of the Sanction Guidelines. Further review is underway of changes to make the Sanction Guidelines more effective.

Two things in there jump out at me. The first is the notion that these revisions were made, in part, to “accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings.”  That seems backwards, doesn’t it?  Shouldn’t the sanctions imposed in disciplinary proceedings comport with the Sanction Guidelines, and not the other way around?  Based on this logic, hearing panels can impose whatever sanctions they want, even if not supported by the Sanction Guidelines, safe in the knowledge that it doesn’t matter because the Guidelines will subsequently be revised to accommodate the award.  It reminds me of the old joke:  what’s the secret to being successful at golf?  Not announcing your intended target until after you hit the ball, so you can see where it’s headed.  Hey, I meant to hit the drink cart!

Second, it is sobering to understand that even “further review” is underway, to make the Guidelines “more effective.” What does that mean?  What would make the Sanction Guidelines effective is if FINRA Enforcement lawyers and hearing panels actually paid some attention to them.  In reality, that is not necessarily the case.  Because the Guidelines serve merely as the starting point to the determination of the appropriate sanction, followed by the consideration of any aggravating or mitigating evidence, the actual sanctions imposed in cases are too often way, way beyond the ranges stated in the Guidelines.  In other words, the Guidelines often provide fairly little practical guidance in terms of what to expect for sanctions.  That makes them ineffective.  Tweaking the Guidelines won’t change that.  Now, actually following the Guidelines, that would make them effective.

Ok, what changes did FINRA make?

  1. They added a new principal consideration that makes it clear that exerting “undue influence” over a customer, particularly a senior or “vulnerable” investor, will be viewed as a nasty aggravating circumstance.
  2. There is a new sanction guideline for “violations related to systemic supervisory failures and firm wide supervisory problems.” According to the Reg Notice, “the current Sanction Guidelines related to supervision violations focus on limited supervisory failures, such as those involving an individual or a small number of associated persons” so a new guideline was needed. Note: the stated range for fines under the new guideline goes up to $292,000, while the upper end of the range for an “ordinary” violation for inadequate written supervisory procedures is only $37,000. Clearly, based on the size of some of the fines that FINRA has meted out recently in supervisory cases, it must have deemed them to be systemic failures.
  3. There is also a new guideline for improper borrowing from or lending to customers, which I suppose makes sense, as (1) there was no such guideline and (2) FINRA loves to bring these cases. The recommended fine ranges as high as $73,000, and, naturally, a bar is also possible when the circumstances are aggravating enough, as is the case for nearly every rule violation. There are a couple of curious things in the principal considerations for this guideline: the “purpose” of the loan, and whether the “terms” of the loan are reasonable. I am really not sure why these facts would be even slightly important to FINRA’s determination of the appropriate sanction. I mean, loans are impermissible, period. Thus, should it matter if the registered rep borrows money to go gambling in Vegas, versus paying his mortgage? Or if interest is charged or not? FINRA’s willingness to stick its nose into the tiniest of crevices never ceases to amaze.
  4. The most interesting of the changes is a new principal consideration that requires that hearing panels and Enforcement take into consideration “the potential mitigative effect of regulator or firm-imposed sanctions and corrective action.” In other words, “[a] final action by another regulator against an individual respondent for the same conduct is a potentially mitigating circumstance.” But, it is not a simple analysis. To get credit for a prior regulatory action, a respondent must show that (1) the conduct at issue before the other regulator was essentially identical, and (2) any fine has already been fully paid, any suspension has been fully served, and any other sanction has been satisfactorily completed.

It is also possible now, theoretically, to get credit for some firm-imposed sanctions, particularly fines and suspensions. The problem is that the guidance is super vague.  You tell me what this means:  “Adjudicators should consider according some mitigative weight where these firm-imposed sanctions have already been fully satisfied by a respondent.”  “Some mitigative weight??”  I have no idea what that is intended to convey, and I am sure that what FINRA Enforcement will deem to be the proper mitigative weight will be very different than me.

Finally, the new Sanction Guidelines suggest that an individual respondent may be able to avoid a harsh sanction if he was aleady fired by his BD for his misconduct. But, again, the guidance is slippery, at best:  “With regard to a firm’s prior termination of the respondent’s employment based on the same conduct at issue in a subsequent FINRA disciplinary proceeding, Adjudicators should consider whether a respondent has demonstrated that the termination qualifies for any mitigative value, keeping in mind the goals of investor protection and maintaining high standards of business conduct.”  I suppose that this would allow a respondent to demonstrate that he’s “already learned his lesson,” so further sanctions are unnecessary.  I just cannot imagine a case where this argument would get any traction.  Especially in light of the admonition in the new principal consideration that “Adjudicators may find—even considering a firm’s prior termination of the respondent’s employment for the same misconduct at issue—that there is no guarantee of changed behavior and therefore may impose the sanction of a bar.”  That just opens the door, and opens it wide, for FINRA to make the facile argument that there’s never a guarantee, in any case, that there won’t be repeat misconduct.

To end this post on low note, here’s another example of FINRA’s utter disregard for the impact its disciplinary cases have on people (a topic I covered earlier in a post about FINRA’s disregard for the consequences when it deems a failure to update a Form U-4 in a timely manner to be willful). The last sentence of the new principal consideration reads: “FINRA has determined that how long a respondent takes to regain employment, loss of salary, and other impacts of an employment termination are merely collateral consequences of being terminated and should not be considered as mitigating by Adjudicators.”  “Collateral consequences.”  Such language.  Did United hire FINRA to write its initial public response to the doctor being dragged off the plane?  Does FINRA serve as a consultant to famous wordsmith Sean Spicer?