The rise in regulatory fines

How FINRA compliance consultants ease enforcement action outcome

Regulator examiners are focused on deterring fraud and uncovering supervisory failures, but aren’t expected to draft tailored compliance programs and procedures for a firm. Firms that need this type of assistance reach out to qualified FINRA compliance consultants for guidance. Additionally, FINRA experts are often called upon by either firms or regulators to supervise remediation efforts and monitor on-going compliance activities.

Benefit of hiring a FINRA consultant to assist in remediation

FINRA compliance consultants improve enforcementOne of the benefits of on-boarding a compliance consultant to resolve a violation is having them communicate directly with the regulatory examiner. A consultant with appropriate credentials, such as a General Securities Principal Series 24, can directly communicate procedural changes to enforcement examiners while providing an added sense of relief to the firm’s managing members and confidence for the regulator. Additionally, if new business practices are recommended, the business owner may benefit from better devised solutions through an expert in compliance, rather than an examiner who’s focus is limited to regulation and not hands-on compliance supervision.

Regulators realize they get a benefit from member firms who employ FINRA or SEC consultants in resolving their remediation concerns and value the partnership. Regulation consultants have expertise that extends beyond resources of regulators, which increases examiner confidence. Use of a compliance expert often demonstrates to regulators that the firm takes the violation seriously and is committed to improving. Most firms find, outsourcing to a compliance firm outweighs the cost by getting matters settled sooner and with less frustration. Managing partners also benefit by eliminating uncertainty in interaction with the examiner, so they can focus on assuring clients and helping the business recover from negative press or otherwise.

In some instances, a regulator will require a compliance expert for remediation and on-going monitoring. Settlement may include reviewing transactions, determining whether responsibility lies upon officers or employees, and uncovering additional victims.  Delegating this responsibility onto the compliance consultant does not come lightly. Regulators will seek complete independence between the parties. Restrictions of working together in the past and/or future will be part of the agreement; to ensure conflicts of interest are eliminated.

It’s possible the compliance firm may be asked to enforce the necessary settlement reparations. They may take on the responsibility to calculate and release agreed disbursements for the firm. This gives the regulator confidence the settlement shall be paid under the terms of the enforcement agreement. In such cases, the compliance firm is generally required to submit a report to the regulator showing proof of activities on a scheduled basis. By assigning these tasks to a compliance consultant the regulator can move on to other cases needing attention without the work of verifying receipts or calculating damages. When a mandated restitution is expected to be resolved over several months or a few years, outsourcing to a consultant can significantly shift the burden away from examiners and make life for the firm easier as well.

In some cases, regulators run a risk by mandating support from a outsourced compliance expert. Compliance consultants look at policy and procedure compliance from a perspective that differs from the view of examiners. Occasionally a compliance professional will interpret the degree of egregiousness different than the examiner. The compliance professional may assert the examiner was too strict in applying the rule, or even too broad. These types of discrepancies may delay resolution of an enforcement case until resolved. Therefore, it is important to work with a compliance consulting firm with strong experience in enforcement matters that knows how to demonstrate their own assessment clearly to regulators if necessary.  A seasoned compliance professional may even be able to draw a conclusion that sanctions imposed by the regulator are disproportionate to the level of misconduct. In this type of situation, it is important to have a solid team of compliance professionals advising your firm before coming to a resolution agreement.

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Does your FINRA, MSRB, or SEC member firm need assistance navigating remediation for an enforcement action or exam? Our professionals are highly experienced with regulatory rules. We develop policy and procedure manuals for Broker-Dealers, RIAs, Municipal Brokers, Private fund managers, and more. Our expertise is vertically integrated compliance solutions for firms; bringing business planning, operations, trading, and registration. RND professionals provide –

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SEC Enforcement Action 2008 thru 2016

Independent Compliance Consultants as a Remedy in Regulatory Cases

SEC Enforcement Action 2008 thru 2016Independent Consultants are frequently mandated as part of the remedy in securities enforcement actions. The SEC and SRO’s like FINRA and MSRB recognize the value of having an independent compliance consultant monitor or perform specific tasks related to a case and ensure corrective action is being applied appropriately. The tasks are generally outlined in the settlement agreement and can include a number of months or years a Broker-dealer or RIA may be required to retain services. In such cases, regulators describe the independent consultant as a; compliance consultant, disbursement consultant, or monitor depending on their prescribed use.

 For the most part regulators are relying more and more on the resources of consultants for obvious reasons.  Leveraging consultants reduces reliance on limited regulatory resources and frees up staff for new cases. Consultants are also able to handle tasks more efficiently where regulators are not designed to, such as cash disbursements or re-writing policies and procedures. Regulators may even request a detailed analysis of a firms’ compliance program by an outside consultant as requisite to completing remediation.

Respondents (defendants) in a regulatory case are naturally concerned about the cost of consultants, as the expense is out of pocket, but many firms agree independent consultants are generally less expensive and easier to work with than regulatory examiners. For this reason, often a BD or RIA will request review of their records prior to being fully investigated by Regulators. This allows the firm an opportunity to discover and remedy risks outside of the public eye, and may hopefully improve a firms’ chance of satisfying a regulator earlier and for less of an expense.

If a Regulator requires an independent consultant as part of a settlement, respondents should take care to have the terms and work to be performed by the consultant clearly defined. An overly broad mandate by a Regulator can have a serious consequence on an unsuspecting firm. Given the consultant is independent, they are barred from exhibiting a conflict of interest between the firm and regulator, and are often given leverage to pursue whatever remedy deemed appropriate in absence of clear instructions. With that in mind, the use of a third party consultant can be a very positive remedy to improving the relationship between firms and regulators. Often regulators value the expertise of consultants and their ability to monitor a firm after a regulatory issue has been discovered.

 Firms which are proactive about a regulatory inquiry leading to enforcement may be able to bypass the request for an independent consultant by taking steps on their own to remedy risks before a formal resolution is handed over. Early efforts by respondents demonstrate to a Regulator that the firm understands the depth of the problem and takes remediation seriously. Some steps a firm may take include; investigating and reporting problems whether they’ve been identified by the Regulator or not, and demonstrating remediation by making a voluntary restitution or adopting new policies to prevent future occurrences.   These steps can also provide a basis for reduced fines, sanctions, or suspensions.

Firms faced with a regulatory inquiry should understand that Regulators can impose “any equitable relief deemed appropriate or necessary”. This may include; providing restitution to persons harmed, revising procedures, ceasing certain business activities, and more. Requiring the resources of an independent consultant is frequently considered an appropriate course of action to ensure a complete remedy. Thus, while independent consultants are not explicitly authorized by regulators at this time under specific licensing, they are a frequent sought for their expertise and ability to develop sensible solutions in remedy enforcement cases.


Is there a regulatory inquiry or issue you are concerned about?  Our staff has helped numerous firms subject to inquiry and examination.  We’ve assisted law offices across the US working with Broker-dealer, RIA clients, and other financial service businesses. Our services include providing expert testimony, analysis of records and remediation; as well as outsourced compliance and principal support on an interim or month-to-month basis. We’re happy to work directly with financial service firms, their attorneys, CPAs, investors, shareholders, and liaison with Regulators. Visit our services menu for more information.

Reach out to us for a confidential discussion of your business and we’ll see what we can do to help. If we’re unable to assist, we’ll try to find a suitable resource for you.

Expungement Rule 2080

Removing Disputed Claims from FINRA Brokercheck under Expungement Rule 2080

Since the June 2016 hyperlink rule, FINRA brokercheck has an expanded role for client / investors who wish to find out about their advisors record with other clients and member firms.

Expungement Rule 2080Its anticipated that investors will use this tool more and more going forward to search advisor information as well as firm history and its officers. While, the hyperlink rule didn’t change information available on FINRA Brokercheck; it does drive more traffic to brokercheck and create greater awareness of the tool.  The byproduct of which is; informed investors that know little about facts of a case which may have been a frivolous claim or a dropped dispute.

Not to discount legitimate claims against advisors who’ve made grievous mistakes or falsified records. Expungement under Rule 2080 is only available where factual basis exists. Still many advisors who would qualify for expunging a claim do not pursue it. Bottom line investor disputes and claims hurt an advisors relationship with their employer and their clients, and can ruin chances of transitioning to another firm.


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The rise in regulatory fines

SuperSized Fines

Supersized fines are the next big thing in regulatory enforcement. 

FINRA sanction fines jumped from a reported $60 million in 2013 to $135 million in 2014, while the number of disciplinary actions dropped.  Restitution to customers and others shows a quadruple increase from 2013 to 2014 going from $10 million to $52 million. What happened?

The rise in regulatory fines

The Breakdown

Research, Analysis and Reporting: Cases against firms and individuals in this area spiked for 2014 with over $59 million in fines against 19 cases. The most significant difference was fines increased 5800%, from just $1 million in 2013; $15 million of which was against 1 firm. Read more

Mary Jo White SEC

Concern about Higher Standards in Enforcement Proceedings against Compliance Officers

NSCP letter to SEC August 18, 2015 expresses concern about higher standards in enforcement proceedings against compliance officers.

National Society of Compliance Professionals, in their letter dated August 18, 2015, states “Compliance officers are already highly motivated … and do not need the threat of enforcement action to do their jobs well.”

The letter comes on the heels of three important Administrative Proceedings where compliance officers are alleged to have “caused” a primary violation committed by another.  See Administrative Proceedings file numbers: 3-16591 (June 2015), 3-16501 (April 2015), and 3-15873 (March 2015). These proceedings portray a higher liability standard for compliance officers.  Whereas prior decisions reflect (i) a primary securities law violation, (ii) knowing or extremely reckless conduct, and (iii) substantial assistance to the violator.

As the NSCP points out in their letter, SEC higher standard applies 20/20 hindsight, a valuable resource in learning how to improve procedures and policies; but compliance officers work in real-time. Reviewing someone’s decisions ex-post record and concluding they should have known better at the time, sets a dangerous tone to fundamental policy. The “perfect policy” perspective fails to recognize that real-time decisions are rarely “perfect”.  Compliance officers navigate in a landscape where procedures are routinely re-examined and improved based upon lessons learned and new facts uncovered.

A question is, whether enforcement actions will further motivate compliance officers to greater vigilance, or risk demoralizing them into believing that even using their best judgment will not protect against risk of career ending enforcement action. NSCP is concerned that setting this stricter precedent may result in some of the best compliance officers exiting the industry rather than face new risks.

As an additional point, NSCP asserts that compliance officers do not generally operate the business for which they are hired. They are typically an advisory role. Compliance officers establish procedures or policies, but are rarely charged with administering them.  Administration rests on the head of executives and line managers. Holding compliance officers accountable for failures linked to implementation fails to recognize the limited scope of power within which many compliance officers operate.

While the NSCP is all for effective enforcement, they base their argument on a matter of fairness. NSCP asks that the SEC place more recognition on the limitations of compliance officers and the difficult landscape in which they make decisions. As noted, even the American Institute of Certified Public Accountants recognizes that controls are limited in nature and may not prevent or detect and correct all errors and omissions, as stated in SSAE-16 statement of standards.

Read the Letter

Does the SEC go too far in holding compliance officers accountable for violations committed by others?  

FINRA new rules

May 2015 – Increasing FINRA Sanction Guidelines

FINRA is stepping up its position on sanctions with recommendations for stricter guidelines.  What reasons do they have?FINRA new rules

The regulatory mission of FINRA is to protect investors and strengthen market integrity through self-regulation. By emphasizing self regulation, FINRA infuses balance into the regulatory process. But, what is a regulatory authority to do when firms continue to engage in reckless and intentional misconduct? Impose stronger sanctions.

Increased punishment is key to how FINRA plans to deal with firms that continually miss the mark in reporting and compliance requirements. The 2015 stance is that sanctions should be “significant enough to achieve deterrence, and not a mere cost of doing business.”  Is your firm prepared to deal with the complex rules and increased cost of fines?

FINRA has published the Sanction Guidelines so members, associated persons, and counsel can become familiar with the types of disciplinary actions that may be applicable to various cases. The guidelines are not intended to be absolute, but are intended to provide direction for imposing fines. The guidelines infer that firms may fall above or below standard guidelines in their failure to procedures, and that sanctions should be applied fairly based on aggravating or mitigating factors.

Aggravating factors can include:

  • Prior disciplinary actions
  • A pattern of misconduct
  • Ignoring red flags and warnings from regulators
  • Attempts to delay FINRA’s investigation, or conceal or mislead


While, mitigating factors may include:

  • Accepting of responsibility
  • Substantially assisting  FINRA in its investigation
  • Demonstrating the misconduct was not typical of the firm’s compliance history
  • Reasonable reliance on competent legal or accounting advice

Read new FINRA Guidelines here


See the Guidelines

Outside Business Activities

Failure to Honor Arbitration Award

Distributions of Securities

Financial and Operational Practices

Impeding Regulatory Investigations

Improper Use of Funds or Forgery

Qualification and Membership

Quality of Markets

Reporting of Information

Sales Practices


SEC Commissioner Fiercely Criticizes Investment Advisers. Are Big Changes Coming?

The investment industry has been steadily rebuilding its image in the aftermath of the financial crisis and the Bernie Madoff scandal. However, things are not getting fixed quickly enough for David Gallagher, the Commissioner of the SEC. Gallagher still sees major issues with how regulators deal with problem investment advisers and believes this hurts the entire financial industry.    Read more