Finra ordered broker-dealer firms to pay $43 million in restitution for harmed investors from January to August this year, sharply higher than the full-year total of $26.9 million in 2016.
Finra says seeking restitution for harmed investors and spending for investor protection is a key priority even as one legislator expressed concern that the regulator imposes fines and keeps those proceeds more than it facilitates restitution for harmed investors.
At a House Subcommittee on Capital Markets, Securities and Investments hearing last month on the oversight of Finra, Rep. Brad Sherman, D-CA, noted Finra had fined broker-dealer firms $176.3 million in 2016 and kept the proceeds from the fines, while a relatively smaller amount was returned to harmed investors.
Finra CEO Robert Cook reaffirmed the regulator’s commitment to helping investors harmed by broker-dealer firms.
“Finra will continue to pursue vigorously those cases that involve harm to investors and work to remove the individuals who engage in this conduct from the industry whenever appropriate,” he said.
The record-high total fines imposed by Finra last year were an aberration, Cook noted.
Finra records show that the total fines imposed by the regulator from January to August this year was $26.6 million – sharply lower than the total fines imposed in the full year of 2016. On the other hand, the latest total for restitutions from January to August 2017 is higher than the total fines in the same period.
Sherman asked Cook if Finra was considering facilitating the allocation of “a greater percentage” of money to harmed investors, suggesting the regulator have a more “meaningful, robust, public report" on how it uses the fines it collects. Cook said Finra is open to insights related to those suggestions.
At a sit-down discussion earlier this month David Burton, economic policy senior fellow of Heritage Foundation, asked Cook if the fines should be used for an “investor reimbursement fund.”
Cook said Finra is looking into that option. He noted, however, that the SEC has looked into the issue of how SROs should use fines and has said they should be used for regulatory support or capital initiatives.
“We’re in the process of preparing our budget for 2018, and as part of that, we’re working with the board to think through what is the right approach to fines going forward.”
At the House subcommittee hearing, Cook said the fines collected by Finra “are an important part of funding important investor protection initiatives.”
He said the fines partly go to funding capital and strategic initiatives, such as the Trade Reporting and Compliance Engine (Trace) for Treasuries that the regulator launched in July for member firms to report transactions post-trade in U.S. securities. “That type of technology investment is made possible by the fines.”
The timing and the gravity of the cases are largely responsible for the total amount of restitutions and fines in any given year, a Finra spokeswoman tells FA-IQ.
The total restitutions ordered by Finra in 2016 were sharply lower than the record-high $96.6 million total in 2015, for example.
The 2015 restitutions included 10 firms that were ordered to pay more than $48 million in missed sales charge discount cases involving charities and retirement accounts; two broker-dealer firms that were told pay a total of $15.3 million to customers in Puerto Rico in supervisory failure cases; and 12 firms ordered to pay more than $4 million in missed sales charge discount cases involving unit trust purchases.
Meanwhile, the total fines in January to August this year have decreased because many of the cases with larger fines closed toward the end of 2016 rather than in 2017, the spokeswoman says.
Citing an example, she says one case that involved a $10 million fine had been under investigation by the regulator’s enforcement division for around two years, and happened to close on Dec. 28, 2016.
In 2016, four cases made up around $62 million of the total fines imposed in 2016. These included two AML-related cases involving Raymond James (May 2016) and Credit Suisse (December 2016), with fines totaling $24 million; a MetLife variable annuities case with a $25 million fine; and a Deutsche Bank supervisory case with a $12.5 million fine, she says.
“Without these four cases, the total fines would be consistent with prior years,” she says.
This year, Wells Fargo Clearing Services and Wells Fargo Advisors Financial Network were the latest ordered by Finra to pay restitution, totaling $3.4 million, to more than 1,300 customer accounts for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and related supervisory failures. Finra says certain Wells Fargo registered representatives recommended volatility-linked ETPs from July 2010 to May 2012 without fully understanding their risks and features.
Last month Finra ordered Morgan Stanley to pay $9.78 million in restitution to more than 3,000 affected customers for failing to supervise its representatives’ short-term trades of unit investment trusts from January 2012 through June 2015.
The largest restitution ordered by Finra so far this year was an order for Plano, Texas-based broker-dealer Red River Securities and its CEO Brian Keith Hardwick to pay $24.6 million in restitution to customers for fraudulent sales in five oil and gas joint ventures. The firm was also apparently engaged in a pattern of misrepresentations and omissions that spanned nearly four years and involved sales in the risky joint ventures.