On January 8, 2013, FINRA issued a release discussing highlights from 2013. In 2012, FINRA assessed $68 million in fines, ordering a record $34 million in restitution to injured customers.
According to the report, FINRA’s Office of Fraud Detection and Market Intelligence referred 692 cases of potential fraud to the Securities and Exchange Commission and other law enforcement agencies. Among the cases referred were 347 insider trading matters and 260 other fraud-related matters.
FINRA counted as significant accomplishments concerning actions WR Rice, Hudson Valley and TWS Financial. As to WR Rice, FINRA filed an action to halt fraudulent sales activities by WR Rice Financial Services and its owner, as well as the conversion of investors’ funds or assets. As to Hudson Valley, FINRA expelled the firm and barred the CEO for defrauding its clearing firm and customers by using their funds and securities to cover losses caused by the CEO’s manipulative day trading. As to TWS Financial, FINRA filed a complaint alleging affinity fraud targeting the Polish community.
Disciplinary actions included cases involving , among other things, exchange-traded funds, structured products and non-traded REITs. As to these complex products, FINRA pointed to the following actions:
Non-traded REITs – FINRA sanctioned David Lerner Associates, the firm’s founder, President and CEO, and the firm’s head trader in an action related to the non-publicly traded Apple REITs involving suitability and supervision violations. The settlement also consolidated numerous matters, including a municipal and CMO markup case, a pending enforcement investigation of more recent municipal and CMO markups, and 10 pending market regulation matters involving municipal markups identified through surveillance reviews.
Improper Sales of ETFs – FINRA sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse ETFs without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases. In addition, FINRA also brought similar cases against Merrill Lynch and Scott & Strongfellow.
Structured Products – Merrill Lynch was fined $450,000 for supervisory failures relating to the sales of structured products to retail customers. The firm relied upon automated exception-based reporting systems to flag transactions and/or accounts that met certain pre-defined criteria, but did not specifically monitor for potentially unsuitable concentration levels.
Finally, FINRA highlighted its efforts to protect investors including the implementation of “a new suitability rule requiring a broker-dealer or their associated persons to have a ‘reasonable basis’ to believe a recommended transaction is suitable for the customer, based on information obtained through ‘reasonable diligence’ to understand a customer’s investment profile.” FINRA published a FAQ on the rule.