Summary of FINRA Regulatory Actions in 2021

In 2021, the Financial Industry Regulatory Authority’s (FINRA) Enforcement Division brought 126 enforcement actions and issued fines against firms totaling $99.3 million. Over half that amount came from a single $57 million fine. In comparison, FINRA issued a total of $57 million in fines against firms and individuals during all of 2020.¹ When this one action is removed, fines against firms in 2021 totaled $42.3 million. The chart below summarizes the actions and fines issued each quarter in 2021.²

	Q1 2021	Q2 2021	Q3 2021	Q4 2021
Total Fines	$20,536,000	$6,340,000	$68,005,000	$4,420,000
# of Enforcement Actions	43	35	29	19

FINRA imposed the most fines, in aggregate, against firms for alleged violations related to supervision, recordkeeping, and variable annuities (see the chart below, which summarizes the primary causes of actions generating fines totaling $1 million or more):³

Primary Cause	# of Actions	Total Fines
Supervision	12	$66,350,0004
Recordkeeping	5	$10,650,000
Variable Annuities	5	$5,140,000
Regulation SHO	5	$1,425,000
Anti-Money Laundering (AML)	9	$1,420,000
Fingerprinting	1	$1,250,000
Trade Reporting	9	$1,138,000
Private Securities Transactions	2	$1,015,000

In addition to the fines above, FINRA ordered $2.9 million in restitution across four actions for alleged violations related to investment company share class issues. FINRA also expelled two firms: one for its alleged refusal to respond to a regulatory request, and another for alleged violations related to crowdfunding and a refusal to respond to a regulatory request.

Summaries of Notable Actions from Q2 through Q4 2021

In the last three quarters of 2021, the five largest fines against individual firms were each over $1 million and levied due to alleged supervision violations. The supervision failures described in these actions were related to areas like communications with the public, due diligence, suitability, recordkeeping, market access, and AML. During this same period, there were five instances where FINRA ordered a firm to pay over $800,000 in restitution; these matters involved alleged violations related to best execution, sales practice problems related to variable annuities and alternative mutual funds, and supervision issues related to suitability and communications with the public. Below, we summarize the most notable enforcement actions between the second and fourth quarters of 2021.

Supervision and Technology

FINRA Rule 2210 sets standards for firms’ communications with the public. It requires, among other things, that such communications be “fair and balanced”, that they do not “omit any material fact or qualification”, and that they do not contain any “false, exaggerated, unwarranted, promissory or misleading statement or claim”. The rule also requires an appropriately qualified registered principal of the firm to approve each retail communication, unless an exception applies, and electronic and written correspondence be supervised and reviewed. To be “appropriately qualified”, principals should have the experience and expertise required to complete their supervisory responsibilities.

FINRA Rule 2220 covers communications to the public about options. Standards for such communications include avoiding broad generalities and balancing communications that reference potential opportunities with statements describing the corresponding risks.

FINRA Rule 3310 requires firms to conduct ongoing customer due diligence such as monitoring transactions to identify and report suspicious activity and maintaining and updating customer information. In addition, FINRA Rule 2360 requires firms to conduct due diligence when approving customer accounts for options trading.

In Q3 2021, FINRA sanctioned a firm for alleged violations involving communications with the public under Rules 2210 and 2220, failure to have a reasonably designed customer identification program under Rule 3310, and failure to conduct due diligence before approving options accounts under Rule 2360, among other issues. Many of the alleged violations involved the firm’s reliance on newer technology or automated processes without appropriate supervision of these tools. For instance, FINRA alleged that the firm relied on account approval bots with only limited oversight by principals, which led to the firm allegedly approving accounts with Social Security numbers belonging to deceased persons. In addition, FINRA identified customers who had submitted multiple applications for options trading in a short period of time with different and conflicting information until an application was approved. Firms should review and confirm the information received from a customer is consistent and relevant based on everything the firm knows about the customer.

The firm also allegedly relied on mathematical models and formulas to provide account information to customers via website and mobile applications, yet it did not require a supervisory principal to review the accuracy of these models or formulas. This caused the firm to allegedly display to customers inaccurate and inconsistent account information, and to issue erroneous margin calls.

While the firm relied heavily on technology and automation, its business continuity plan allegedly did not apply to technology-related disruptions, like outages, but instead focused only on events that would keep employees physically out of the office.

FINRA censured the firm and imposed a fine of $57 million, restitution of $12.6 million plus interest, and an undertaking to retain an independent consultant. It also required the firm to certify it has stopped making the alleged false and misleading statements.

Suitability

FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended securities transaction is suitable for the customer. This belief should be based on reasonable diligence that provides the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security. (Note that Regulation Best Interest now takes precedence over Rule 2111 as it relates to recommendations to retail customers.)

In Q3 2021, FINRA sanctioned a firm for allegedly failing to establish and maintain a supervisory system reasonably designed to achieve compliance with FINRA Rule 2111 as it pertains to early rollovers of Unit Investment Trusts (UITs). Since UITs have a variety of upfront sales charges and maturity dates that are generally 15 or 24 months after their one-time public offering, short-term trading of UITs can lead to higher costs for investors that may be unsuitable. While the firm recognized in its written supervisory procedures (WSPs) and other internal documents that UITs are generally long-term investments that should be held for at least 12 or 15 months, FINRA alleged that the firm’s supervisory system was not reasonably designed to identify early UIT rollovers or patterns of early UIT rollovers. For instance, the firm used an automated report that flagged UIT sales approximately seven months after the UIT was first issued, but the report did not identify early rollovers after that initial seven-month period.

Firms should monitor trading activities that occur in customer accounts to confirm that transactions are suitable for the customer. This includes confirming that automated reports are designed to flag actions prohibited by the WSPs.

For its alleged violations, FINRA censured the firm and imposed a fine of $3.25 million and restitution of $8.4 million plus interest.

Supervision Related to Market Manipulation

FINRA Rule 3110 requires firms to establish and maintain WSPs and a system to supervise the activities of each associated person that is reasonably designed to comply with applicable securities laws.

FINRA Rule 3310 requires firms to develop and implement a written AML program reasonably designed to achieve and monitor the firm’s compliance with the requirements of the Bank Secrecy Act, including establishing policies to detect and cause the reporting of suspicious transactions.

In Q3 2021, FINRA sanctioned a firm for violating Rule 3110. They alleged the firm failed to have a supervisory system reasonably designed to comply with federal securities laws and FINRA rules prohibiting market manipulation. While the firm’s WSPs required branch office managers to review the firm’s trade blotter daily, the firm allegedly did not provide these managers with training or guidance to identify prohibited transactions or explain how they should review the information for patterns of potentially manipulative trading over time. The WSPs also failed to specify how or when to escalate or document potentially manipulative activity. Finally, FINRA alleged that the firm did not have exception reports or other electronic surveillance to detect potential market manipulation. The volume of trades through the firm made manual review unreasonable.

For its alleged violations, FINRA censured the firm, imposed a fine of $1.5 million, and required the firm to certify within 60 days that it had updated its supervisory system.

Also, in Q3 2021, FINRA sanctioned another firm for allegedly failing to reasonably supervise for potentially manipulative trading, violating Rule 3110. This firm provided direct market access to day traders through its broker-dealer subscribers. FINRA alleged that during a six-year period, the firm generated over 350,000 exceptions and alerts at FINRA for potentially manipulative trading. For some of the period under review, the firm did not have WSPs, supervisory systems, or risk management controls to monitor for certain types of manipulation, such as layering and wash trades. When the firm implemented exception reports, these reports were not reasonably designed to identify the manipulation they were meant to flag. In instances where potentially manipulative activity raised an alert, FINRA alleged the firm did not review some of these alerts for years.

FINRA also alleged the firm did not have an AML program reasonably tailored to the risks of its direct market access business. When the firm did identify manipulation, the firm allegedly failed to consider whether such activity should be reported on a suspicious activity report (SAR), violating Rule 3310.

For its alleged violations, FINRA censured the firm and imposed a fine of $1.25 million and an undertaking to retain an independent consultant.

These market manipulation cases highlight the need for firms to carefully tailor their WSPs, AML procedures, and exception alerts to effectively address the type of business they conduct. WSPs should specify when to escalate potentially manipulative activity and how to document such escalation; simply noting that questions about the WSPs can be raised with compliance staff is not enough. If potentially manipulative activity is a business risk, the firm should update its AML procedures to include forms of manipulative trading as examples of suspicious activity red flags. Firms should also provide branch office managers with training and guidance appropriate to their role.

Supervision and the Customer Protection Rule

Municipal Securities Rulemaking Board (MSRB) Rule G-27 requires each dealer to establish and maintain a supervisory system and written procedures designed to ensure its municipal securities activities comply with applicable securities laws.

The Customer Protection Rule, Securities Exchange Act Rule 15c3-3(d)(4), requires that, no later than one business day after 30 calendar days, a broker-dealer must take prompt steps to obtain physical possession or control of securities in the broker-dealer’s books or records that allocate to a short position.

In Q4 2021, FINRA sanctioned a firm for allegedly failing to establish and maintain a supervisory system and WSPs designed to address short positions in municipal securities within 30 days, violating MSRB Rule G-27 and the Customer Protection Rule. In particular, FINRA alleged the firm did not have processes designed to promptly detect and resolve short positions in municipal securities and prevent the effects on customers, including loss of favorable tax status. FINRA alleged the systems the firm had in place were only designed to prevent short positions originating from retail transactions in certain fixed-rate bonds; they did not consider or address municipal securities short positions arising from other causes. FINRA noted that it issued Regulatory Notice 15-27 to provide guidance to firms for identifying and resolving short positions and fails-to-receive in municipal securities.

For its alleged violations, FINRA censured the firm and imposed a fine of $1.5 million and an undertaking to certify within 180 days that its WSPs and supervisory systems comply with securities rules in connection with the matters identified.

Crowdfunding

FINRA Funding Portal Rule 800 explicitly applies the FINRA Rule 8000 series, including FINRA Rule 8210, to funding portals, absent a few exceptions and “unless the context requires otherwise”. FINRA highlighted this in Regulatory Notice 16-06, footnote 11, stating that “[u]nder Funding Portal Rule 800, funding portal members are subject to FINRA Rule 8210, which requires, in part, that a member must provide information and testimony and must permit an inspection and copying of books, records or accounts pursuant to the rule”.

In Q4 2021, the FINRA National Adjudicatory Committee (NAC) heard a case of first impression regarding the interpretation and application of SEC crowdfunding rules and FINRA Funding Portal Rules as applied to a FINRA funding portal member and its associated person. The NAC confirmed not only that FINRA Rule 8210 applies to a funding portal member, but that FINRA may request documents and information related to the member’s source funding and the member’s parent company’s finances. Due to the funding portal and its associated person’s alleged failure to respond fully and completely to FINRA’s requests within a reasonable amount of time, FINRA expelled the funding portal member and barred the associated person from associating with any FINRA funding portal member in any capacity. The NAC acknowledged that this bar “may result in a ‘bad actor disqualification’ under SEC Rule 506 of Regulation D of the Securities Act”.

Overall, FINRA imposed three separate expulsions against the funding portal firm:

1. first, for violations of FINRA Rule 8210;
2. second, for “making false, exaggerated, unwarranted, promissory, and misleading statements about their investment in an issuer, the due diligence that they conducted on issuers, and certain real estate investments”;
3. and third, “as an aggregate sanction for its gatekeeper, investor protection, and supervisory failures”.

2021 FINRA Fines

The table below summarizes disciplinary actions and fines against firms in 2021 in alphabetical order by primary cause.⁵

Primary Cause	# of Actions	Total Fines
Alternative Mutual Funds	3	$550,000
AML	9	$1,420,000
Best Execution	2	$655,000
Branch Inspections	1	$15,000
Crowdfunding	1	Expelled
Display of Customer Limit Orders	1	$45,000
Electronic Communications	3	$640,000
Excess Trading	1	$350,000
Fair Prices and Commission	2	$110,000
Financial Reporting	1	$38,000
Fingerprints	1	$1,250,000
Identity Theft	1	$65,000
IPO	1	$270,000
Locking or Crossing Quotations	1	$50,000
Market Access Controls	2	$380,000
Mortgage-Backed Securities	2	$250,000
Mutual Funds	1	$150,000
Net Capital	2	$25,000
OATS	2	$95,000
Options	1	$20,000
Order Memoranda	1	$55,000
Order Receipt Time	1	$75,000
Order Routing	1	$850,000
Outside Brokerage Accounts Monitoring	2	$695,000
Outside Business Activities	4	$210,000
Private Placements	4	$115,000
Private Securities Transactions	2	$1,015,000
Prohibited Settlement Conditions	1	$20,000
Quotations Relating to Municipal Securities	1	$80,000
Recordkeeping	5	$10,650,000
Refusal to Respond to Regulatory Request	1	Expelled
Registration	4	$95,000
Regulation M	1	$85,000
Regulation NMS	2	$50,000
Regulation SCI	1	$250,000
Regulation SHO	5	$1,425,000
Regulation S-P	2	$250,000
Research Reports	3	$755,000
Retail Communications	1	$100,000
Rule 8311 - Effect of Disqualification	1	Initially Expelled, Sanctions to be Redetermined
Screening Non-Registered Employees	1	$650,000
Share Class	4	$0 (Restitution Ordered Instead of Fines)
Short Sales	1	$300,000
Short Tender Rule	1	$800,000
Short-Interest Reporting	1	$250,000
Suitability	4	$660,000
Supervision	12	$66,350,000
TRACE	1	$275,000
Trade Reporting	9	$1,138,000
Trade Throughs	1	$175,000
Trading Ahead	1	$65,000
Transmittal of Funds	1	$35,000
Unregistered Offerings	2	$10,000
Valuations	1	$300,000
Variable Annuities	5	$5,140,000
Grand Total	126	$99,301,000

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Our broker-dealer services division helps firms comply with FINRA's regulatory requirements. Our services include:

• Compliance program development
• Supervisory control and anti-money laundering (AML) testing
• Initial and ongoing membership application assistance
• Trading reviews
• Conflict management analyses
• Corrective action assessments
• Written supervisory procedure assistance
• Customized regulatory and compliance consulting

For more information about FINRA's actions in 2021, or to find out how we can help your firm comply with their requirements, please reach out to your ACA consultant, or contact us below.

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^{1 See FINRA’s Report on Use of 2020 Fine Monies.}

^{2 The data in this report comes from FINRA’s Monthly Disciplinary Actions. We calculated the number of actions per month and quarter based on the month in which an action was reported, not the date of the action.}

^{3 This report focuses on alleged compliance issues that led to sanctions in each disciplinary action. Not all alleged violations are explicitly discussed.}

^{4 Removing the $57 million fine leaves $9,350,000 imposed over 11 supervision cases in 2021.}

^{While expulsions and fines are identified in the chart, please note that FINRA sanctions in 2021 also included restitution, disgorgement, undertakings, and certifications.}