Emily Gordy quoted in Law360: FINRA’s Blockbuster 2014 Has Attorneys Wondering About Sequel
February 23, 2015
FINRA’s Blockbuster 2014 Has Attys Wondering About Sequel
Share us on: By Ed Beeson
Law360, New York (February 20, 2015, 3:31 PM ET) — By doubling its enforcement haul last year, the Financial Industry Regulatory Authority showed it’s not afraid of writing big tickets against the same Wall Street giants that fund its operations, but it’s an open question as to whether the $134 million or so in sanctions it collected in 2014 are a sign of bigger fines to come.
The brokerage industry’s self-regulatory organization tagged big names including Citigroup Inc., Morgan Stanley Smith Barney LLC and Bank of America‘s Merrill Lynch unit with multimillion-dollar penalties over claims that they broke industry rules ranging from investment banking conflicts of interest to sales practice issues involving retail and small business customers.
All totaled, “supersized” fines helped FINRA enforcement amass its largest pile of bounties since the financial crisis, with 25 cases collectively garnering more than $100 million in fines, according to a study published Thursday by attorneys at Sutherland Asbill & Brennan LLP.
Additionally, the $135 million that Sutherland attorneys estimate FINRA assessed in sanctions last year is more than twice the $60 million it imposed in 2013, and well beyond the $28 million to $72 million it collected in each of the years between 2008 and 2012.
“It could mean that FINRA is upping the bar and will be expecting larger and larger fines in future cases,” said Brian Rubin, a Sutherland partner and former FINRA enforcement attorney who writes the annual study.
Compounding these fines was the fact that 2014 actually saw FINRA take fewer enforcement actions than it had in prior years: just under 1,400 disciplinary actions compared to the 1,535 it brought in 2013.
Topping out last year’s cases was a $15 million penalty brought against Citigroup in late November over what FINRA said were violations extending over nine years around the bank’s alleged failure to properly supervise its research analysts, including at so-called “idea dinners” where analysts offered up investment tips in violation of rules put in place after a landmark global settlement from a decade ago.
Following this was the $8 million penalty against Brown Brothers Harriman & Co. in February 2014 for anti-money laundering rule violations over its alleged failure to detect and investigate suspicious penny stock transactions.
The regulator also hit Merrill Lynch in June with an $8 million fine and $24 million restitution order over mutual fund sales charges the brokerages allegedly assessed on small-business retirement plans and charities.
The firms settled their cases without admitting or denying wrongdoing.
Collectively, however, the biggest action FINRA took was in reaching settlements worth $43.5 million with 10 investment banks over their alleged promises of providing favorable research to win a potential slice of underwriting a Toys R Us initial public offering. Focusing again on conflicts of interests in the production of equity research, FINRA looked to give an inside view of how these play out at banks when it quoted one analyst telling a colleague that he would “crawl on broken glass dragging my exposed junk” in order to win his firm a potentially lucrative role in the underwriting syndicate.
To some former FINRA enforcers, the 2014 docket only raises the bar for the regulator and it is likely they will look to match in years to come.
“I think this is the new normal,” said Jeff Kern, special counsel at Sheppard Mullin Richter & Hampton LLP and a former FINRA enforcement attorney. “I don’t think FINRA has any intention of resting on its accomplishments or to view this as an anomaly.”
But to others, an anomaly may very well be what the 2014 enforcement record is. While FINRA is no stranger to bringing enforcement actions with price tags in the tens of millions dollars, it was unusual to see so many cases land almost at once. In the last few weeks of the year, FINRA managed to assess about half of 2014’s fines through “blockbuster” cases alone.
“It was definitely an alignment of the stars,” said Emily Gordy, an attorney with Shulman Rogers Gandal Pordy & Ecker PC and a former senior vice president of FINRA enforcement.
“Those cases were investigations that had been pending for a while.”
FINRA officials view steep fines as appropriate in light of the gravity of the alleged misconduct and the message of deterrence it sends, Gordy said. But she also acknowledged a speech last summer by U.S. Securities and Exchange Commission member Kara Stein, in which she said she worried FINRA’s enforcement sanctions might be “financially insignificant” for wrongdoers, as something that may still be resonating at the regulator.
As for what may come, attorneys said they expect FINRA will make good on its promise to pay close attention to issues around the treatment of seniors, retirees and those who have suddenly come into wealth, such as through an inheritance.
They also expect close attention to cybersecurity in light of recent hacks against firms and guidance that regulators have issued about best practices to combat these.
Likening it to the flurry of activity to enforce anti-money laundering rules put in place after the Sept. 11, 2001, attacks, Kern of Sheppard Mullin said, “I think cybersecurity could be the new AML.”
–Editing by John Quinn and Kelly Duncan.