FINRA’s Top Enforcement Issues of 2023

The Financial Industry Regulatory Authority leaned into the recent Regulation Best Interest rule in 2023, with it landing as the fourth-most enforced area for the industry regulatory body, according to analysis by Eversheds Sutherland LLP released Wednesday.

The legal firm’s analysis of FINRA’s monthly disciplinary reports counted 15 Reg BI cases bringing in $6 million in fines last year. LPL Financial LLC accounted for most of the fine haul with a $5.5 million fine issued in December for allegedly failing multiple supervisory lapses, including failing to supervise hundreds of thousands of transactions that its brokers placed with product sponsors. LPL did not admit or deny the findings.

The Securities and Exchange Commission’s Reg BI became enforceable in June 2020, with FINRA making its first enforcement in October 2022. The rule requires that broker/dealers who recommend securities and investment strategies involving securities put their client’s interest ahead of their own, and includes disclosing all conflicts of interest, the scope and terms of any conflicted relationships, and maintaining policies for generally complying with the regulation by putting clients’ interest first. FINRA is overseen by the SEC.

Adam C. Pollet, partner, Eversheds Sutherland, anticipates continued FINRA enforcement of Reg BI will remain in the top five for years in the future, in part as it seeks to protect long-term retirement savers from conflicts of interest.

“Certain of the Reg BI cases related to violations involving seniors and some of them may have related to long-term/retirement savings products,” Pollet says. “FINRA has made a push to protect seniors and cases often mention when seniors were involved. We expect continued scrutiny over Reg BI-related issues whether related to retirement products or otherwise.”

The law firm found that FINRA’s fines of $89 million overall “increased significantly compared to fines imposed in 2022.” The firm noted, however, that a large part of that amount was from a $24 million fine for a spoofing charge levied against Bank of America’s and its Merrill division. Spoofing is a type of fraudulent trading involving using a non-bona fide order to “create a false appearance of market activity” that can be used to benefit the trader. Bank of America did not admit or deny the charges that two former traders engaged in 717 instances of spoofing. 

Eversheds Sutherland’s analysis found FINRA’s top enforcement actions, by amount of fines, were:

• spoofing—making its first appearance on the firm’s list;
• incorrect or manipulated trade reporting, the fourth year this enforcement action has made the firm’s list;
• failing to report money laundering, returning to the list after an absence in 2022;
• failure to comply with Reg BI; and
• suitability cases, or not exercising reasonable due diligence before approving customers for options trading, another area that did not make the list in 2022.

Eversheds noted that FINRA ordered 14 fines of $1 million or more, or what it calls “supersized” fines in 2023, compared to 11 such fines in 2022. FINRA issued four fines of $5 million or more, or “mega” fines, as compared to two in 2022.

Overall, the number of cases reported by FINRA dropped 9% year-over-year in 2023 to 453 disciplinary actions.