On September 29, 2022, FINRA issued significant revisions to its Sanction Guidelines (the “Guidelines”), used both by its Office of Hearing Officers and its appellate body, the National Adjudicatory Council, in litigated disciplinary actions. FINRA’s Department of Enforcement also uses the Guidelines when evaluating sanctions in negotiated settlements. Notably, FINRA has stated that these revisions are purposefully designed to better align the Guidelines with FINRA’s evolved Enforcement program. This may be an effort to end or minimize the often notable difference in settlements and litigated outcomes with the self-regulatory organization.
The new Guidelines are effective immediately. Firms are encouraged to review them promptly and assess the potential impact on any current matters or discussions.
Key takeaways from the new Guidelines include:
- Introduction of one subset of Guidelines for individuals, and one subset of Guidelines for firms.
- Establishment of separate fine ranges for small firms and mid-size or large firms. This is the first time FINRA has expressly written into the Guidelines that monetary sanctions should bear some relationship to the size of the firm.
- Elimination of upper limit on the fine range for mid-size or large firms for certain rule violations FINRA has described as the “most serious violations that FINRA pursues.” These include:
- Sales of Unregistered Securities;
- Failure to Respond Truthfully to Requests Made Pursuant to FINRA Rule 8210;
- Best Execution;
- Marking the Open or Marking the Close;
- Churning, Excessive Trading, or Switching;
- Fraud, Misrepresentations, or Material Omissions of Fact;
- Pricing – Excessive Markups/Markdowns and Excessive Commissions;
- Research Analysts and Research Reports
- Supervision – Systemic Supervisory Failures; and
- Anti-Money Laundering (“AML”).
- Addition of new AML guidelines with no upper limit on fines for mid-size or large firms for certain AML program violations, as well as three broad categories of violations for sanctions consideration (Failure to Reasonably Monitor to Report Suspicious Transactions; Deficient AML Compliance Program; and Failure to Provide Independent Testing, Designate Responsible Individuals or Training).
- Significant changes to fine ranges for Quality of Markets rule violations including eliminating the long-standing tiered approach using first, second, and subsequent actions, and formally eliminating the three-year lookback limitation for prior disciplinary history.
- Analysis of potential applicability of non-monetary sanctions, including suspensions, bars, and limitations on business.
- Establishment of a minimum fine of $5,000 for all firm types.
This revision also removed guidelines in 20 areas that historically had occurred infrequently or were covered by another guideline. The removal of a sanction guideline does not impact FINRA’s ability to enforce the underlying rule. Where FINRA seeks to charge a violation of a rule not addressed by a specific sanction guideline, analogous or similar rule guidelines may be used for guidance.
One important observation is that FINRA’s other SRO clients are not bound by FINRA’s guidelines nor FINRA’s proposed sanction analysis. As a result, in matters that FINRA brings on behalf of other SROs, concurrently or otherwise, for the same alleged conduct and violations, the imposition of monetary sanctions can be significantly inconsistent among the SROs and wholly inconsistent with the Guidelines.
The FINRA press release announcing the revisions, including links to the revised Sanction Guidelines, and accompanying Regulatory Notice 22-20 and Sanction Guidelines – FAQs is available here.
