May 2018 Revisions to the Sanction Guidelines - FAQ
The FINRA Sanction Guidelines were updated as of May 2018. In addition, Regulatory Notices 18-17, 17-13, 15-15, 11-13, 11-07, 06-10, 05-17, 04-17, 03-65, 06-10 and 06-55 summarize changes to the Sanction Guidelines.
1. Q: How were the Sanction Guidelines developed?
A: Prior to 1993, there were no published sanction guidelines, but there was internal guidance used by FINRA's staff. FINRA published the FINRA Sanction Guidelines ("Guidelines") in 1993 so that members and associated persons could become familiar with the disciplinary sanctions that could result from typical securities industry rule violations. Since that time, as the appellate body for FINRA disciplinary actions and the FINRA committee that considers matters of disciplinary policy, the National Adjudicatory Council (NAC) has had final authority over the content of the Sanction Guidelines. FINRA's By-Laws specifically authorize the NAC to consider and act on disciplinary proceedings, enforcement policies, and policies with respect to fines and other sanctions. The NAC periodically designates special subcommittees to review and revise the Sanction Guidelines as needed. For example, the NAC revised the Sanction Guidelines in May 1998, April 2001, October 2003, March 2004, March 2005, March and September 2006, February and March 2011, May 2015 and April and December 2017. Although FINRA staff provides input to the NAC with respect to revisions of and additions to the Sanction Guidelines, the NAC and the FINRA Board possess ultimate authority with respect to the Sanction Guidelines.
2. Q: Who uses the FINRA Sanction Guidelines?
A: The Sanction Guidelines apply to all formal FINRA disciplinary actions, whether settled or fully litigated. FINRA's adjudicatory bodies—Hearing Panels and the NAC—rely on FINRA's Sanction Guidelines to determine appropriately remedial sanctions. FINRA's Departments of Market Regulation and Enforcement and the defense bar and member firms utilize the Sanction Guidelines in negotiating settlements in disciplinary matters. FINRA's Departments of Market Regulation and Enforcement also rely on the Sanction Guidelines in determining the level of sanctions to seek in litigated cases.
3. Q: Who serves on FINRA's adjudicatory bodies?
A: FINRA's adjudicatory bodies are made up of industry members and non-industry members. Hearing Panels consist of one Hearing Officer and two individuals who currently are associated with a member firm or retired therefrom. The NAC is a committee of 14 individuals, seven of whom are industry members and seven of whom are non-industry members.
4. Q: Do the most recent revisions to the Sanction Guidelines (announced in March 2006 in Notice to Members 06-10) relate to all subject areas of the Guidelines?
A: No. These revisions involve only the quality of markets (Market Regulation) guidelines and the guidelines for pay-to-play violations (Municipal Securities Rulemaking Board (MSRB) Rules G-36 and G-37).
5. Q: Will the Guidelines revision that raises the floor for quality of markets and pay-to-play violations to $5,000 mean that the minimum sanction in these types of cases will be higher?
A: No. In the overwhelming majority of cases, the minimum sanction for these violations will not change. Recent history indicates that FINRA's formal disciplinary actions in these areas generally have involved sanctions of $5,000 or more. Market Regulation's practice has been to bring formal disciplinary actions only when a sanction of at least $5,000 is warranted. And there have been no pay-to-play cases with sanctions of less than $5,000 for more than three years.
In cases in which a sanction of less than $5,000 is appropriate, generally no formal disciplinary action will be brought. The case will be closed without action, an informal sanction (such as a letter of caution or compliance conference) will be imposed, or a sanction will be imposed under the Minor Rule Violation Plan.
6. Q: Do the Sanction Guidelines require automatic sanctions in all disciplinary proceedings?
A: No. The Guidelines do not set fixed standards; they provide flexible guidance.
Because the sanction ranges recommended in the Guidelines are not mandatory, FINRA adjudicators and settling parties can vary from the recommended sanction ranges or impose no monetary sanctions depending on the facts and circumstances of each individual case. The third General Principle Applicable to All Sanction Determinations contained in the Sanction Guidelines explains that: "The recommended ranges in these guidelines are not absolute. The guidelines suggest, but do not mandate, the range and types of sanctions to be applied. Depending on the facts and circumstances of a case, Adjudicators may determine that no remedial purpose is served by imposing a sanction within the range recommended in the applicable guidelines; i.e., that a sanction below the recommended range, or no sanction at all, is appropriate."
7. Q: What discretion do the Hearing Panels and the NAC have in determining sanctions?
A: The Hearing Panels and the NAC have wide discretion in determining appropriate sanctions. The Guidelines do not prescribe fixed sanctions for particular violations. Rather, they provide direction for adjudicators in imposing sanctions consistently and fairly. The Sanction Guidelines recommend ranges for sanctions and suggest factors that adjudicators may consider in determining, for each case, where within the range the sanctions should fall or whether the sanctions should be above or below the recommended range.
8. Q: What was the rationale for the most recent revisions to the quality of markets and pay-to-play Sanction Guidelines (announced in Notice to Members 06-10)?
A: There are several policy considerations that factored into the NAC's determination to revise the quality of markets and pay-to-play Sanction Guidelines. One driving consideration was to conform the guidelines to actual practice—in other words, reflect the minimum sanction actually imposed in these types of formal disciplinary cases. In addition, the amendments are intended to promote the efficiency and effectiveness of FINRA's disciplinary program by focusing FINRA's resources on bringing formal actions in these areas only in matters that warrant a sanction at the revised low end of $5,000. Another consideration was the NAC's interest in assuring that the sanction ranges recommended in FINRA's Sanction Guidelines preserve the deterrent effect of FINRA's sanctions. As a policy matter, the NAC also was interested in increasing the level of flexibility built into individual guidelines. Finally, with these revisions, the NAC sought to provide additional guidance to adjudicators and settling parties as to mitigating and aggravating factors.
9. Q: Do these revisions mean that FINRA staff will no longer address less significant violations through informal actions?
A: No. This revision does not change FINRA staff's approach to cases involving less serious violations. The decision whether to bring a formal action or resolve a matter informally is a case-by-case determination made by the Market Regulation, Member Regulation, and Enforcement departments. FINRA staff will continue to address less significant misconduct (misconduct that does not warrant a formal disciplinary proceeding) through letters of caution, compliance conferences and other informal means.
The Sanction Guidelines apply to formal disciplinary actions, whether settled or fully litigated. Quality of markets and pay-to-play violations that do not rise to a level warranting formal action and a minimum fine of $5,000 can continue to be addressed through informal means. Thus, this revision conforms the Sanction Guidelines to the existing practice for the vast majority of formal actions in these areas of violation.
10. Q: What process did the NAC follow in adopting the most recent revisions (announced in Notice to Members 06-10)?
A: In July 2005, the NAC, a 14-member balanced committee that includes seven industry and seven non-industry members, considered proposed revisions to the quality of markets and pay-to-play Sanction Guidelines. After extensive discussion, the NAC designated a subcommittee of three industry NAC members and two non-industry NAC members to conduct a detailed review of the proposed revisions. The Subcommittee met several times and conducted a line-by-line review of the quality of markets guidelines and guidelines for violations of the pay-to-play rules. The subcommittee made numerous changes to the proposed revisions and approved a final product for presentation to the NAC at the NAC's February 2006 meeting. The full NAC voted unanimously to approve the subcommittee's proposed revisions to the quality of markets and pay-to-play guidelines and announced the revisions in Notice to Members 06-10.
11. Q: Can FINRA assess a sanction that is lower than the minimum in the recommended fine range?
A: Yes. The Sanction Guidelines state in clear and unequivocal language that they are intended to be guidelines and that they are not absolute. In both settled cases and litigated matters, depending on the facts and circumstances of each case, the sanctions imposed may fall outside the ranges recommended in the Sanction Guidelines.
12. Q: Why did FINRA increase the low end of the recommended monetary sanction ranges in the quality of markets and pay-to-play guidelines?
A: Increasing the recommended minimum monetary sanctions serves to support FINRA staff's expectation that it will address less serious misconduct informally and pursue formal action only in cases in which a monetary sanction of $5,000 or more is warranted. This increase also serves to align the Sanction Guidelines with FINRA's recent past practice of seeking settlements only for those quality of markets and pay-to-play violations warranting a fine of $5,000 or more. Other factors that drove the NAC's determination included an interest in preserving the deterrent effect of FINRA's sanctions. Until now, sanction ranges have remained the same since 1998 for the pay-to-play guidelines and since 1996 or earlier for the quality of markets guidelines. The NAC sought to avoid the misperception that FINRA's fines can be treated as the cost of doing business.
13. Q: Is the ability of adjudicators to impose fines on a per violation basis a new concept in the Sanction Guidelines?
A: No. In fact, prior to this change, fines on a per violation basis were the default option under the Sanction Guidelines. Since 1998, the General Principles Applicable to All Sanction Determinations have stated that aggregation of violations may be appropriate for purposes of determining sanctions if the violative conduct was unintentional or negligent, did not result in injury to public investors, or the violations resulted from a single systemic problem or a cause that has been corrected. With these revisions, the NAC clarified FINRA's existing policy on the aggregation or "batching" of violations for purposes of sanctions by highlighting when it is appropriate to consider sanctions on a "per violation" basis and when aggregation is acceptable.
The General Principles also stated that numerous, similar violations may warrant higher sanctions because the existence of multiple violations may be treated as an aggravating factor and advised that multiple violations may be treated individually such that a sanction is imposed for each violation. To provide additional clarity in the quality of markets guidelines and the guidelines for violations of Rules G-36 and G-37, the NAC has indicated that, in egregious cases involving multiple violations and a history of misconduct, the adjudicator or settling parties can consider imposing a fine on a per violation basis.
14. Q: Are there other significant revisions to the FINRA Sanction Guidelines for quality of markets and pay-to-play violations in addition to increasing the low end of the monetary sanction ranges to $5,000?
A: Yes. The revised Guidelines also enable adjudicators and settling parties to take into account other important factors in addition to whether the respondent has a history of similar violations such as, for example, the ratio of the respondent's violative trade reporting to the total number of trades that the respondent reported, the respondent's rate of compliance as compared to compliance rates for industry peers, and whether the respondent has improved its compliance rates.
15. Q: What about factoring into sanctions other real-life issues, such as technical systems that don't work properly?
A: With these revisions, the NAC aimed to clarify individual guidelines regarding quality of markets and pay-to-play violations in areas in which adjudicators and settling parties have had difficulty interpreting the Guidelines as written. The NAC also sought to bring more consistency to the factors considered in determining sanctions for related types of violations. With these goals in mind, the NAC added to individual guidelines a principal consideration that states that, in certain limited circumstances, it may be appropriate to consider as a mitigating factor a respondent's diligent installation and upkeep of systems supplied by third-party vendors. In the trade reporting guidelines, the NAC also added as a consideration whether the reporting failure could have been discovered from a routine review of the report cards that we post on our secure Website.
The NAC's revisions to the principal considerations included in the quality of markets and pay-to-play guidelines also allow adjudicators greater flexibility to determine appropriate sanctions. For example, in an effort to ensure that adjudicators do not feel compelled to increase sanctions automatically for all subsequent violations, the NAC clarified FINRA's policies on the consideration of aggravating and mitigating factors for purposes of sanctions. Under the former structure, most reporting and quality of markets guidelines grouped the misconduct primarily by whether it was a first, second, or subsequent action. Under this structure, the recommended monetary sanction range for first actions involving large numbers of violations or otherwise egregious misconduct was at the low end of possible monetary sanctions. Conversely, the guidelines addressed less egregious misconduct that happened to be a second or subsequent violation by recommending sanction ranges at the high end, regardless of whether other mitigating factors were present. To address this lack of flexibility, the revised quality of market and pay-to-play guidelines focus the adjudicator's attention on other aggravating and mitigating factors in addition to the respondent's disciplinary history.
16. Q: Is the concept of imposing sanctions outside the ranges recommended in the Sanction Guidelines for egregious misconduct a new concept adopted with this revision?
A: No. Included in the revised trade reporting guidelines is a concept already employed by FINRA adjudicators and recognized by the Securities and Exchange Commission—that, in certain rare circumstances, a first-time violation may be egregious and it may be appropriate to impose monetary sanctions that are outside the recommended range. This revision was a recognition of this fact, not a change in policy intended to make a finding of egregious misconduct easier. Similarly, the revised Sanction Guidelines specify that subsequent violations may not warrant a stepped-up sanction.
17. Q: How do adjudicators determine if a violation is egregious?
A: To determine the seriousness of a violation, Hearing Panels and the NAC, both of which include industry peers, assess the individual facts and circumstances of the case. The adjudicators also consider all relevant aggravating and mitigating factors, including the Principal Considerations Applicable to All Sanction Determinations as well as any additional considerations listed in the appropriate individual guidelines.
18. Q: Is the new TRACE (Trade Reporting and Compliance Engine) guideline similar to other trade reporting guidelines?
A: Yes. Since the last revision to the quality of markets guidelines, FINRA developed and implemented TRACE and eliminated FIPS (Fixed Income Pricing System). The NAC therefore eliminated the guideline for FIPS violations and added a guideline for TRACE violations. The TRACE guideline is based on the concepts used in other trade reporting guidelines. For example, all four trade-reporting guidelines included in the quality of markets guidelines have the same fine ranges for first, second, and subsequent violations; all four include the same "egregious case" language (that egregious cases may require fines outside the recommended range or on a per violation basis); three of the four (excluding options reporting) include a principal consideration regarding systems-related failures; and all four include a principal consideration regarding the length of time during which the misconduct occurred.
19. Q: What should an adjudicator consider when evaluating if a pattern exists? NEW
A: The Sanction Guidelines state that “[a]djudicators should consider imposing more severe sanctions when an individual respondent’s Disciplinary and Arbitration History: (a) includes significant past misconduct that is similar to the misconduct at issue; or (b) shows a pattern of causing investor harm, damaging market integrity, or disregarding regulatory requirements.” The pivotal new concept introduced by the revisions is whether the misconduct in the current disciplinary case, together with regulatory actions and arbitration history, establishes that the respondent has a pattern of causing harm.
Adjudicators should draw on their experience and exercise their judgment when evaluating factors that establish or negate a pattern. Adjudicators should consider the nature, severity, and frequency of all disciplinary history, adverse arbitration awards and arbitration settlements, or a combination of these events, as well as “the length of time between events, the isolated nature of an event, or other extenuating circumstances.”
These Sanction Guidelines revisions allow adjudicators to consider more completely a respondent’s interactions with customers and regulators. Adjudicators will no longer be limited from considering what, in some cases, could be an extensive series of arbitration awards and arbitration settlements that share similarities with the violations found in a disciplinary case.
20. Q: What source will adjudicators accept for establishing a respondent’s history of arbitration awards and settlements? NEW
A: When FINRA’s Department of Enforcement is arguing that a respondent has arbitration awards or arbitration settlements that are relevant to determining sanctions, adjudicators will rely on the information about those awards or settlements that is included in the Central Registration Depository, or Web CRD®. The parties may not collaterally attack or seek to undermine the validity of an arbitration award or arbitration settlement. Just as the purpose of a disciplinary hearing is not to relitigate past regulatory actions that are relevant to disciplinary history, the purpose of a disciplinary hearing is not to relitigate past arbitration awards or arbitration settlements.
21. Q: How should an adjudicator determine if a respondent was the subject of an arbitration award or settlement? NEW
A: CRD reflects the answers provided to questions on the Forms U4 and U5, which ask about individuals being the subject of arbitrations. Further details about these arbitrations are reported in the Disclosure Reporting Page (DRP) for a customer complaint, arbitration, or civil litigation. See Form U4 question 14I(4), Form U5 question 7E(4), and Customer Complaint/Arbitration/Litigation DRP. Forms U4 and U5 require firms to report when a customer’s arbitration statement of claim alleges a sales practice violation by an identified associated person, or by an associated person whose identity may be determined by the firm, but who is not named as a party to the arbitration. The instructions to Forms U4 and U5 explain that a firm should answer “yes” if an individual was not named as a respondent, but either: (1) the statement of claim specifically mentions the individual by name and alleges the individual was involved in one or more sales practice violations; or (2) the statement of claim does not name the individual, but the firm has made a good faith determination that the sales practice violation alleged involves one or more particular individuals. FINRA’s guidance regarding how to report when a registered person is the subject of an arbitration claim is contained in Regulatory Notice 09-23. FINRA Regulatory Notice 09-23, at 4-5 (May 18, 2009). Adjudicators will rely on this CRD information for arbitrations in which the respondent was the subject of an allegation of a sales practice violation.
22: Q: Can an adjudicator consider a respondent’s efforts to expunge an arbitration award or settlement? NEW
A: While the Sanction Guidelines provide that adjudicators will rely on CRD information regarding arbitration awards and arbitration settlements, these awards and settlements can be expunged from CRD if an associated person is granted an arbitration award that contains expungement relief, meets the narrow grounds specified in FINRA Rule 2080, and receives judicial confirmation of the expungement relief. This process is explained further on finra.org. See FINRA Notice to Arbitrators and Parties on Expanded Expungement Guidance (last updated September 2017). The process of a respondent obtaining an arbitration award that orders expungement and having a court confirm the award can be time consuming. The Sanction Guidelines therefore counsel adjudicators that they may consider evidence of a pending request to expunge customer dispute information that reflects an arbitration award or arbitration settlement from CRD, or evidence that a respondent has petitioned a court of competent jurisdiction to confirm an arbitration award that contains expungement relief. When either of these facts is established, the adjudicator may consider this information when evaluating whether a pattern exists.