FINRA Enforcement: New Direction for the Regulator

by McGuireWoods LLP
Contact

With new leadership at the helm of the Financial Industry Regulatory Authority (FINRA), the broker-dealer industry’s primary self-regulator, and the FINRA Enforcement Department, there is an opportunity for real and productive change. FINRA CEO Robert Cook has engaged in an extensive listening tour since he came on board, has launched an inward-looking review (named FINRA360) and, importantly, promoted Susan Schroeder to executive vice president, head of enforcement. Cook also made Schroeder a direct report.

In addition to the organizational changes occurring in the Enforcement Department, discussed below, perhaps the most significant action by Schroeder has been developing and announcing principles or goals that will guide Enforcement’s decision-making on matters. Schroeder delivered her remarks outlining the principles in a Feb. 12 speech at SIFMA’s Anti-Money Laundering Conference. Those firms and individuals and their counsel and consultants dealing with FINRA enforcement matters should be aware of her remarks and, more importantly, apply the principles in addressing identified issues. The importance of Schroeder’s remarks was reinforced at the recent SIFMA 2018 Annual Compliance & Legal Conference, where the speech and the information imparted about the new direction of the Enforcement Department were mentioned on several occasions, including by Cook.

Schroeder’s remarks covered the considerations of FINRA’s Enforcement Department when it evaluates: (1) whether to bring an action, (2) what sanctions to seek and (3) how to describe the department’s actions to make it apparent why the action was filed and why the sanctions are what they are.

In addition to the specific counsel Schroeder provides, there are two other points critical to understanding the current state of FINRA. First, this new way of “doing business” comes out of the FINRA360 review, an enterprise-wide, ongoing assessment to review, question its ongoing processes, rethink how it regulates, and ultimately, change to make FINRA a more efficient and effective regulator. What this tells the industry is that these changes on the enforcement side are real, not just talk. It is a long time in coming and never more critical to operationalize for FINRA than right now. Second, Schroeder’s vision for the enforcement program is not just a product of her own musings. She is a direct report of the CEO. The details of the new enforcement program, as described in her speech, clearly have Robert Cook’s support and mandate.

The guidance Schroeder conveyed, if acted on, can potentially save firms and individuals a lot of stress, anxiety, money (especially in fines) and reputational damage. Does that mean there will be no more enforcement actions? Of course not. What it does mean is that the leaders of this enforcement program and of FINRA have staked out what matters to them and the conduct and actions they want to incentivize.

Takeaways

1. What Is the New FINRA Enforcement Department — Getting Back to Basics?

It is now a single, unified enforcement program. The overarching goal with merging the “old” Market Regulation program into the Enforcement Department is to create one consistent program where everybody is headed in the same direction. The next phase — back to basics — identifies common goals for the department and “define[s] what an effective Enforcement action looks like.” 

The Enforcement Department will consist of three components with three deputies reporting to Schroeder — Main Enforcement (f/k/a Home Office Enforcement), Member Regulation Enforcement (f/k/a Regional Enforcement) and Market Regulation Enforcement (f/k/a Market Reg. Legal). The latter two positions are open and in the process of being filled.  Jessica Hopper, until recently the head of the Regional Enforcement Program, has assumed the position of senior vice president, head of the Main Enforcement Program. There is also a fourth deputy position, held by Lara Thyagarajan, who is now counsel to Schroeder. This newly created role is expected to be similar to the policy role of the Securities & Exchange Commission’s chief counsel of the Division of Enforcement.

2. When Is an Enforcement Action Appropriate?

Schroeder identified three primary considerations for assessing when an enforcement action is appropriate:

  1. Was there financial harm to customers? If so, FINRA expects customers to be made whole. 
  2. Was there a significant impact to market integrity? If so, FINRA wants to know if the issue has been fixed and if steps were taken to prevent a reoccurrence. 
  3. Did the misconduct cause significant risk? Most of the cases fall into this category and involve those situations where actual, measurable harm is not there, but there is significant risk of harm — to customers, the firm or the industry.

3. Risk Broken Down, According to FINRA Enforcement

In assessing the third consideration — what constitutes “significant risk of harm” — Enforcement will consider the following factors:

  1. High likelihood of harm. For example, a lot of high-risk brokers are at the firm and a reasonable, tailored supervision program is not in place.
  2. Low probability of occurrence, but high impact. For example, wholesale violations of the customer protection rules, designed to safeguard customer funds and securities, do not occur frequently, but upon occurrence can seriously harm customers. This is especially true when violations occur at financially compromised firms.
  3. Intentional or reckless misconduct. The counterpoint, which Schroeder uses to illustrate this issue, is if a firm misunderstands the rule but is trying to comply, it will be handled differently than the firm that chooses to ignore the same rule.
  4. Recidivism. No further explanation is needed.
  5. Pattern of disregarding regulatory requirements. Viewing paying a fine as the cost of doing business — rather than focusing on an adequate system of controls, compliance and supervision — will not go over well with Enforcement.
  6. Supervision. Supervisors failing to carry out their responsibilities in a reasonable manner creates significant risk. Schroeder acknowledges the issue of CCO liability, saying that this is “not a declaration of war on CCOs: [we will] focus on actual supervisory roles, and [not] reactively blame compliance for the failure of the actual supervisors.”

4. What Sanctions Are Appropriate?

First and foremost, FINRA Enforcement will seek restitution if necessary and appropriate to make harmed investors/customers whole. After that, Enforcement’s assessment of a “fair and effective sanction” is one that is “tailored to most effectively address the root of the problem.”

As anyone can discern from reviewing FINRA’s Sanction Guidelines and prior enforcement actions, FINRA has a number of different sanctions it may seek. Schroeder has “gone on record” that Enforcement “want[s] to choose the tool that most precisely effects the needed change.” One important takeaway for industry from this new mandate is to understand and bring to its discussions with FINRA Enforcement what happened, including any root causes; what needs to change or has changed; and what sanctions are available. In the future, so as to avoid this issue, firms should be prepared to discuss why certain sanctions are or are not appropriate in light of the root cause of the issue and steps taken by the firm to remediate.

Second, if there are systemic or firm-wide issues, the firm should make its best effort to get in front of each issue and remediate as soon as possible. This will go a long way with FINRA in terms of establishing that the firm and its management are committed to doing the right thing. Schroeder noted that FINRA’s goal is to incentivize compliance.

Third, firms earn credit for cooperation. Acting quickly, proactively and comprehensively to address issues is the core goal of FINRA’s credit-for-cooperation policy. Schroeder noted that FINRA currently is reviewing the 10-year-old policy and expects to issue updated guidance this year.

Fourth, actions by other regulators will be considered. In the securities regulatory space, there often is regulatory duplication. Schroeder notes that, with limited resources, there is often little need to duplicate the actions taken by other regulators. Notably, Schroeder also references sanctions imposed internally by the firm. If the regulatory actions and/or internal firm sanctions effectively address the issues, then FINRA should not have to bring an action. While these concepts are included in FINRA’s Sanction Guidelines, historically they have not always been evaluated appropriately. The hope and expectation is that, with the new commitment to be more effective and efficient, FINRA will appropriately defer to other regulators or the firm’s own sanctions if either addresses the conduct.

Schroeder explained that, in determining sanctions to recommend, her department will abide by the following core principles:  

  • Tailor to address the root cause more effectively.
  • Observe proportionality.
  • Incentivize remediation of systemic issues.
  • Reflect credit for cooperation.
  • Reflect action by other regulators or firms.

5. Transparency

The last guiding principle enunciated in Schroeder’s remarks is a goal to ensure that the documents issued in disciplinary actions clearly spell out the legal framework underlying the action. Many in the industry review disciplinary actions to inform and guide their own conduct. No one benefits if all are left scratching their heads as to why a case was brought, an individual sued or a sanction imposed.

The challenge is that firms and individuals on the other side of the negotiating table have an important interest in how the settlement document is worded. Among other things, there are often disagreements on the facts underlying the action and on whether certain facts are relevant and should be included. In her remarks, Schroeder recognized the difficulty, noting that the negotiation process often challenges FINRA in terms of spelling out all of the details. She committed the Enforcement Department to working to find the right balance to ensure that the information explaining the “why” is included in the documents. Proposed respondents and their counsel in negotiations will need to be vigilant when negotiating language in settlement documents regarding this changed approach.

Finally, Schroeder discussed the need to avoid “rule-making by enforcement.”  Both Schroeder and Cook, in his remarks at SIFMA, distinguish “regulation by enforcement,” which is an effective tool to appropriately address deficient conduct, from “rulemaking by enforcement,” which both leaders noted was not an acceptable regulatory response. Enforcement leadership is committed to identifying them early and will seek input from experts outside the department to ensure that the right regulatory response is achieved. Firms will need to be vigilant as well and ensure such issues are appropriately identified and raised within FINRA.

6. What Should Firms/Individuals Do to Meet the New Expectations?

One, if customers/investors were harmed, provide restitution. Second, fix what is broken — the sooner the better. The longer deficiencies continue, the more likely an enforcement action. Third, review compliance, controls and supervision programs to ensure they have sufficient resources, focus, commitments, escalations and follow-up. FINRA’s goal, as stated, is to incentivize compliance — to ensure that paying a fine is not just the cost of doing business and cheaper than having the right systems and processes in place to comply. Fourth, review the guidelines Schroeder spells out in her speech and, if the situation arises, go into discussions with FINRA staff armed with information supporting your position on the issues that organization officials have publicly stated matter to them.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McGuireWoods LLP | Attorney Advertising

Written by:

McGuireWoods LLP
Contact
more
less

McGuireWoods LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.