FINRA in Regulatory Notice 11-07 (February 2011) advised that the FINRA Sanctions Guidelines (the “Guidelines”) were being revised with immediate effect.
Sanctions are essentially what FINRA can collect as penalties for rules violations by member securities broker-dealer firms and associated persons controlled by them. What is interesting is that the Guidelines price out the range of sanctions that can be expected to be imposed for specific rules violations as well as the factors to be considered in whether to impose a sanction on the lower (less punitive) or higher (more punitive) end of the range. All of that makes familiarity with the Guidelines of great importance to securities broker-dealer firms, their management and compliance staffs, and their legal counsel. No doubt they are also of use to private claimants and their counsel since to know the potential fines and the factors affecting the imposition of sanctions is valuable information in stating private securities law violation claims and in claims settlement negotiations.
Beyond that, and of direct interest to both sides of any securities claim (the customers and the firms) is that the Guidelines also give guidance about when restitution is to be made to customers for losses from firm securities rule violations and of when firms must disgorge the ill-gotten gains from their violations. In cases where restitution is ordered, the Guidelines provide for payment of interest thereon and give a methodology for how such interest is to be calculated. Moreover, in cases of widespread harm, where not all customers injured can be found, payment into a state escheat fund may be ordered.
In addition to monetary consequences the Guidelines also deal with when suspensions and bars from the securities industry may be imposed.
At the outset of the Guidelines there is a section on “General Principles Applicable to All Sanction Determinations” followed by a section on “Principal Considerations in Determining Sanctions”. These are relatively brief and certainly are “must” reading for anyone wishing to gain insights from the Guidelines.
Although the Guidelines do not apply as direct authority outside of industry disciplinary proceedings they do incorporate both relevant court and SEC precedent. Thus, they are of interest to persons who want to handicap what might befall, or be bestowed upon, them in SEC or court proceedings, as well as in industry arbitrations and disciplinary proceedings.
There are specific guidelines given for specific rules violations. These specific guidelines constitute the overwhelming bulk of the Guidelines and are organized by topic.
For example, one frequent violation is making of unsuitable investment recommendations to customers in violation of FINRA Rule 2010 and NASD Rule 2010. The Guidelines provide for monetary sanctions of $2,500 to $75,000 for violation plus possibly adding to that recommended fine amount the financial benefit the broker-dealer received plus possibly requiring the broker-dealer to offer rescission to the injured customer(s). The level of fines is to be determined taking into account the "Principal Considerations" at the outset of the Guidelines. Moreover, suspension from the industry in any or all capacities may be imposed for a period of 10 business days to one year. In aggravated cases a longer suspension of up to 2 years or a bar of an individual may be imposed as well as a suspension of a member firm with respect to any or all activities for up to 2 years.
In short, I believe a familiarity with the Guidelines will be extremely useful to anyone in the securities industry, to customers who believe they have been damaged by a securities law violation, and to securities law counsel on both sides of a securities dispute.
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Robert Kiggins, Esq. of McCarthy Fingar LLP, is author of the blog, and may be reached at (914) 385-1024 or rkiggins@mccarthyfingar.com.
Nothing is this blog is intended to be or may be relied upon as specific legal advice. Securities and related laws are complex and competent counsel should be consulted. Views expressed by the author in this article are his own and not those of any other person.
