5 Things You Did Not Know About FINRA: #2 FINRA Disciplines Firms and Brokers

By: Alexandra Hughes, Fall 2015 Student Intern

Because FINRA creates rules and regulations for the securities industry, it only makes sense that FINRA can enforce those rules through disciplinary action. FINRA readily holds its registered securities firms and brokers accountable for their violations of industry standards.

When FINRA finds a firm or broker violated a securities rule, the Enforcement Department or Market Regulation Department files a complaint with the Office of Hearing Officers to institute a formal disciplinary action. The Office of Hearing Officers fashions a three-person panel to hear the case: one Chief Hearing Officer and two industry panelists. During the hearing, evidence is presented to determine whether the firm or broker violated FINRA rules, SEC regulations, or federal securities law. At the end of each case, the panel: issues a written decision explaining its ruling, consults FINRA guidelines to determine the appropriate sanctions for any violations, and even orders restitution to harmed customers. A firm or broker can appeal the decision to the National Adjudicatory Council, then to the SEC, and then to federal court.

In 2014, FINRA:

  • Instituted 1,397 disciplinary actions
  • Ordered payment of $134 million in fines
  • Ordered $32.2 million in restitution to harmed individuals
  • Suspended 705 individual brokers
  • Barred 481 individual brokers
  • Suspended 5 firms
  • Expelled 18 firms

Although FINRA institutes many of its own disciplinary actions, FINRA also works in conjunction with the SEC when the SEC orders disciplinary action. In June 2015, the SEC initiated an action against Goldman, Sachs & Co., J.P Morgan Securities LLC, Morgan Stanley & Co. LLC, Oppenheimer & Co. Inc., RBC Capital Markets, LLC, and Stifel, Nicolaus & Company, Inc. for their failures as underwriters of municipal securities offerings to conduct adequate due diligence on whether the securities’ issuers substantially complied with continuing disclosure obligations. The SEC found that the firms violated Section 17(a)(2) of the Securities Act of 1933 for failure to form a reasonable basis for believing the truthfulness of material representations in the issuers’ official statements. The SEC sanctioned the firms with fines between $400,000 and $500,000. In August 2015, the firms submitted a Membership Continuance Application to FINRA to allow them to continue their membership with FINRA despite their statutory disqualifications. In accepting their application for continued membership, FINRA noted that the firms’ continued membership was consistent with the public interest and did not create an unreasonable risk of harm to the market or investors.