Compliance

Minding Your Regulatory Compliance P’s and Q’s

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Written by Finalis

Last edited in Oct 20, 2022

3 min read

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A Look at FINRA’s Latest Enforcement Cases

Cutting corners on regulatory compliance matters is always unwise—and is guaranteed to be an expensive proposition, for firms and individuals alike. Investment bankers and placement agents working on deals large and small may let the stress and complexity of consummating deals tempt them to compromise on accuracy, completeness, or even truth. They do so at great peril to their business, as the Financial Industry Regulatory Authority (FINRA) is nothing if not eagle-eyed and vigilant in its job of regulatory oversight that keeps U.S. markets safe and fair. FINRA is authorized to wield this powerful and economically significant authority, and will shut down and heavily fine any securities brokerage firm or investment bank that they find guilty of wrongdoing.

FINRA’s Rule 2010 “requires firms, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade.” This requirement marks the stalwart path that the regulatory agency takes to protect investors, and to safeguard the integrity of investment banking, towards the goal of promoting the vibrancy and sustainability of capital markets in the United States.

Investment banking firms or individual bankers seeking to complete deals in a less than 100% honest manner are almost certain to run afoul of FINRA. Numerous cases over the years—both high profile cases or otherwise—underscore this certainty. A look at a couple of recent cases is highly instructive.

In January 2022, FINRA fined a major international financial services company $9M for “multiple operational failures”—having to do with failing to comply with rules requiring firms to disclose potential conflicts of interest when issuing research reports. FINRA found that this company issued more than 6,000 reports to a client, omitting the required disclosures. These disclosures did not indicate that the firm that was the subject of the research report had been its client during the prior 12 months, or that it expected to receive investment banking compensation from them within three months of the reports. Additionally, FINRA found that the company failed to preserve more than 18.6 billion records in a non-erasable and non-writable format, as required.

Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, said of this case: “This should serve as a reminder to member firms of their obligation to protect customer funds from improper use, and to ensure accurate disclosures of potential conflicts between research subjects and firms in research reports, both of which are critically important for investor protection.”

Not just large firms or investment banks face penalties and punishments. A glance at FINRA’s monthly compendium of disciplinary actions reveals a long, often sordid, recitation of individuals levied with fines, and suspensions from association with any FINRA member. In the latest such list—from June 2022, detailing disciplinary actions from the month of April—we find individuals assessed fines from $5,000 all the way to $20,000. In one case, a broker was ordered to pay $50,000 plus interest in partial restitution to customers. This wasn’t just an expensive assessment, it also meant the end of his 10-year career as a broker with 6 separate brokerages over that span of time; his designation at FINRA’s BrokerCheck is now “PR” — Previously Registered Broker.

The details of these intentional—and, one should assume, easy to discover—wrongdoing is illuminating; it is public knowledge besides, as these are published in clear, incriminating, and permanent detail on FINRA’s website. One would think FINRA does this as a cautionary tale—an unmistakable warning to the ethically challenged.

A securities broker-dealer mindful of all this goes a long way towards easing the pain points inherent in the practice of following FINRA rules and regulations to the letter. Absent such a bulwark, boutique investment banks and individual placement agents by sheer definition have a challenge on their hands, hewing to the requirements of regulatory compliance.

Heedlessness to that vital process is at their peril.

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