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Finra Prioritizes Enforcement Based on Harm to Investors

By Rita Raagas De Ramos June 12, 2019

Self-regulator Finra is prioritizing pursuing “impactful cases,” particularly in terms of the degree of harm suffered by investors, according to Christopher Kelly, the self-regulator’s senior vice president of sales practice enforcement.

“What we want … is restitution for harmed investors,” Kelly said last month at Finra’s annual conference in Washington, D.C.

Kelly said the sales practice enforcement team will likely pursue more cases involving excessive trading, illiquid investments, cases involving patterns of trading, and cases involving senior investors, for example.

Around 90% to 95% of the sales practice enforcement cases are derived from the results of examinations of broker-dealer firms or individuals, according to Kelly.

“In a lot of these cases, coming up with the right remediation process is not easy; it’s complicated” for the broker-dealer firms of offending brokers. But Finra can give them guidance based in part on the “many” cases it's pursued and brought enforcement action against in the past, Kelly added.

Kelly said consistency in enforcement is very important for Finra, so the goal is for all of its enforcement offices nationwide to treat cases the same way.

It “will never be perfect, because every case is different,” but Finra will always aim to be consistent, Kelly said.

Susan Schroeder, head of Finra’s Department of Enforcement, said at the conference a “useful guide” for broker-dealer firms that run into compliance issues are the settlement documents released by Finra.

LPL Financial, for one, reviews these settlement documents.

“We view [settlement documents] as opportunities to engage with our partners in compliance, our partners in supervision and our partners in the business side. And it’s really an opportunity to test our own policy controls and make sure they are working… and occasionally identify gaps we need to fill,” Dean Jeske, LPL Financial’s associate counsel, said at the conference.

Ashley Bashur, a lawyer at WilmerHale, said at the conference that it would also help if Finra provides a breakdown of “what went into that sanction.” Specifically, Bashur would like to know how much each specific violation contributed to the total fine imposed by Finra on a broker-dealer firm or broker, noting that what’s published is typically the total fine.

At LPL Financial, one of the first steps taken when a compliance problem has been identified is to investigate the root cause, according to Jeske, noting that this step is critical in trying to avoid a repeat incident.

Finra’s Schroeder said investigating the root cause would indeed be a best practice for broker-dealer firms. She noted that her enforcement team also analyzes the root cause of compliance issues it unearths and a firm or individual’s disciplinary history.


Meanwhile, another priority for Finra is “working with investigation teams earlier in the process,” according to Elizabeth Hogan, the SRO’s senior vice president of market regulation enforcement.

“One thing that I learned coming into this role is getting an understanding of the divide between investigating cases and then turning them over to the legal team,” Hogan said at the conference. Hogan joined Finra in May last year after 12 years as a lawyer in at WilmerHale where she represented firms in regulatory investigations, specializing in matters involving market structure.

Hogan said Finra is “putting a lot of resources” into investigating violations involving order routing, alternate trading systems, best execution, the market access rule, and compliance with Rule 611 of the SEC’s Regulation National Market Systems.

Rule 611 requires, among other things, trading centers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs — the execution of trades at prices inferior to protected quotations, according to the SEC.