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Compliance Concepts

FINRA Sanctions Guidelines: Using it to Your Advantage

November 30, 2018

by Howard Haykin


FINRA, along with its National Adjudicatory Council (NAC) and Office of Hearing Officers (OHO), relies on the FINRA Sanctions Guidelines for determining appropriate (and potentially consistent) sanctions in disciplinary actions. For violations not addressed specifically in the Guidelines, regulators and adjudicators are encouraged to look to the Guidelines for analogous violations.


To illustrate how one adjudicator - an OHO hearing officer – employed the Sanctions Guidelines to conclude that barring a broker was the ‘appropriate punishment’, click on the recent Financialish post, Unsuitable Trading: Why a Broker Was Barred from the Industry. In this case, the hearing officer cited 3 sections of the Sanction Guidelines: (i) General Principles Applicable to All Sanction Determinations; (ii) Principal Considerations in Determining Sanctions; and, (iii) Technical Matters / Suitability - Unsuitable Recommendations (suggested monetary and other sanctions for the applicable violative conduct).


TWO-EDGED SWORD.    Perhaps member firms and their associated persons – as well as their representatives (e.g., attorneys and consultants) - may not fully appreciate or take advantage the FINRA Sanctions Guidelines when framing defenses against allegations of regulatory violations. In particular, I refer to the Principal Considerations in Determining Sanctions section which, as a compliance consultant, I used every time I defended a firm or associated person who was caught in FINRA's cross-hairs. So much so, that I often referred to the Principal Considerations as "My Bible."


The methodology was simple and straightforward - identify defenses against as many of the 19 Principal Considerations as possible. While past results are no guarantees of future successes, I can honestly say that I minimized, if not eliminated, most of the significant fines and sanctions that the regulator had offered my clients. [One proviso: A litigator’s or a spin-doctor’s mentality will help ensure that the process becomes a fail-safe system with a reliably high success rate. 



FINRA’S 19 PRINCIPAL CONSIDERATIONS IN DETERMINING SANCTIONS.    FINRA and its charges utilize the list of 19 Considerations (or “Factors”) for all forms of violations, and they often do so to establish either aggravating and/or mitigating that serve to increase the level of sanction. On the other hand, respondents and their representatives - such as attorneys and compliance consultants - should view such Principal Considerations as opportunities to erect unwavering defenses and justifications for what FINRA views as alleged violative conduct. 


[Take, for example, ... the situation where FINRA has charged a respondent with repeated violations of a single type of violation – say, late trade reporting. I would typically bundle these “numerous acts” as a single violation that recurred due to a single weakness or oversight on the part of the respondent - See Principal Consideration #8.]


Based on the foregoing introductory commentary, I present “My Bible,” otherwise known as Principal Considerations in Determining Sanctions. (Italics provided by Financialish)


1.  An individual respondent’s Disciplinary and Arbitration History, or a respondent firm’s relevant disciplinary history.


2.  Whether an individual or member firm respondent accepted responsibility for and acknowledged the misconduct to his or her employer (in the case of an individual) or a regulator prior to detection and intervention by the firm (in the case of an individual) or a regulator.


3.  Whether an individual or member firm respondent voluntarily employed subsequent corrective measures, prior to detection or intervention by the firm (in the case of an individual) or by a regulator, to revise general and/or specific procedures to avoid recurrence of misconduct.


4.  Whether the respondent voluntarily and reasonably attempted, prior to detection and intervention, to pay restitution or otherwise remedy the misconduct.


5.  Whether, at the time of the violation, the respondent member firm had developed reasonable supervisory, operational and/or technical procedures or controls that were properly implemented.


6.  Whether, at the time of the violation, the respondent member firm had developed adequate training and educational initiatives.


7.  Whether the respondent demonstrated reasonable reliance on competent legal or accounting advice.


8.  Whether the respondent engaged in numerous acts and/or a pattern of misconduct.  


9.  Whether the respondent engaged in the misconduct over an extended period of time.


10.  Whether the respondent attempted to conceal his or her misconduct or to lull into inactivity, mislead, deceive or intimidate a customer, regulatory authorities or, in the case of an individual respondent, the member firm with which he or she is/was associated.


11.  With respect to other parties, including the investing public, the member firm with which an individual respondent is associated, and/or other market participants, (a) whether the respondent’s misconduct resulted directly or indirectly in injury to such other parties, and (b) the nature and extent of the injury.


12.  Whether the respondent provided substantial assistance to FINRA in its examination and/or investigation of the underlying misconduct, or whether the respondent attempted to delay FINRA’s investigation, to conceal information from FINRA, or to provide inaccurate or misleading testimony or documentary information to FINRA.


13.  Whether the respondent’s misconduct was the result of an intentional act, recklessness or negligence.


14.  Whether the respondent engaged in the misconduct at issue notwithstanding prior warnings from FINRA, another regulator or a supervisor (in the case of an individual respondent) that the conduct violated FINRA rules or applicable securities laws or regulations.


15.  Whether the respondent member firm can demonstrate that the misconduct at issue was aberrant or not otherwise reflective of the firm’s historical compliance record.


16.  Whether the respondent’s misconduct resulted in the potential for the respondent’s monetary or other gain.


17.  The number, size and character of the transactions at issue.


18.  The level of sophistication of the injured or affected customer.


19.  Whether the respondent exercised undue influence over the customer.