1. Disciplinary sanctions should be designed to protect the investing public by deterring misconduct and upholding high standards of business conduct.
The purpose of FINRA's disciplinary process is to protect the investing public, support and improve the overall business standards in the securities industry, and decrease the likelihood of recurrence of misconduct by the disciplined respondent. Toward this end, Adjudicators should design sanctions that are meaningful and significant enough to prevent and discourage future misconduct by a respondent and deter others from engaging in similar misconduct.
Sanctions should be more than a cost of doing business. Sanctions should be a meaningful deterrent and reflect the seriousness of the misconduct at issue. To meet this standard, certain cases may necessitate the imposition of sanctions in excess of the upper sanction guideline. For example, when the violations at issue in a particular case have widespread impact, result in significant ill-gotten gains, or result from reckless or intentional actions, Adjudicators should assess sanctions that exceed the recommended range of the guidelines.1
Finally, as Adjudicators apply these principles and tailor sanctions, Adjudicators should consider a firm's size with a view toward ensuring that the sanctions imposed are remedial and designed to deter future misconduct, but are not punitive. Factors to consider in connection with assessing a firm's size are: the financial resources of the firm; the nature of the firm's business; the number of individuals associated with the firm; and the level of trading activity at the firm. This list is included for illustrative purposes and is not exhaustive. Other factors also may be considered in connection with assessing firm size.2
2.
Disciplinary sanctions should be more severe for recidivists. An important objective of the disciplinary process is to deter and prevent future misconduct by imposing progressively escalating sanctions on recidivists beyond those outlined in these guidelines, up to and including barring associated persons and expelling firms. Sanctions imposed on recidivists should be more severe because a recidivist, by definition, already has demonstrated a failure to comply with FINRA's rules or the securities laws. The imposition of more severe sanctions emphasizes the need for corrective action after a violation has occurred, discourages future misconduct by the same respondent, and deters others from engaging in similar misconduct.
Adjudicators should always consider a respondent's relevant disciplinary history in determining sanctions and should ordinarily impose progressively escalating sanctions on recidivists. With respect to individual respondents, adjudicators should consider Disciplinary and Arbitration History.
Consideration of Past Actions by Regulators, Arbitration Awards and Arbitration Settlements
"Disciplinary and Arbitration History" is defined as disciplinary history by regulators, and arbitration awards and arbitration settlements resulting from disputes between a customer and the respondent, including those when the respondent is the subject of an arbitration claim that only names a FINRA member firm. In connection with a disciplinary action against an individual respondent, adjudicators are to consider the respondent's Disciplinary and Arbitration History. Pending arbitrations are not Disciplinary and Arbitration History.
Adjudicators 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.
Pattern
Adjudicators should draw on their experience and judgment when evaluating if a respondent's Disciplinary and Arbitration History establishes a pattern. In addressing whether disciplinary and arbitration matters establish a pattern, the parties may focus on the nature, severity, and frequency of the matters. Factors that weigh against finding a pattern are the length of time between events, the isolated nature of an event, or other extenuating circumstances.3
When adjudicators consider an arbitration award or arbitration settlement, they should rely on the CRD description of the amount of the award or settlement. The parties are precluded from challenging the arbitration award or contesting the CRD description of arbitration settlements.
3. Adjudicators should tailor sanctions to respond to the misconduct at issue. Sanctions in disciplinary proceedings are intended to be remedial and to prevent the recurrence of misconduct. Adjudicators therefore should impose sanctions tailored to address the misconduct involved in each particular case. Section 15A of the Securities Exchange Act of 1934 and FINRA Rule 8310 provide that FINRA may enforce compliance with its rules by: limitation or modification of a respondent's business activities, functions and operations; fine; censure; suspension (of an individual from functioning in any or all capacities, or of a firm from engaging in any or all activities or functions, for a defined period or contingent on the performance of a particular act); bar (permanent expulsion of an individual from associating with a firm in any or all capacities); expulsion (of a firm from FINRA membership and, consequently, from the securities industry); or any other fitting sanction.
To address the misconduct effectively in any given case, Adjudicators may design sanctions other than those specified in these guidelines. For example, to achieve deterrence and remediate misconduct, Adjudicators may impose sanctions that: (a) require a respondent firm to retain a qualified independent consultant to design and/or implement procedures for improved future compliance with regulatory requirements; (b) suspend or bar a respondent firm from engaging in a particular line of business; (c) require an individual or member firm respondent, prior to conducting future business, to disclose certain information to new and/or existing clients, including disclosure of disciplinary history; (d) require a respondent firm to implement heightened supervision of certain individuals or departments in the firm; (e) require an individual or member firm respondent to obtain a FINRA staff letter stating that a proposed communication with the public is consistent with FINRA standards prior to disseminating that communication to the public; (f) limit the number of securities in which a respondent firm may make a market; (g) limit the activities of a respondent firm; or (h) require a respondent firm to institute tape recording procedures. This list is illustrative, not exhaustive, and is included to provide examples of the types of sanctions that Adjudicators may design to address specific misconduct and to achieve deterrence. Adjudicators may craft other sanctions specifically designed to prevent the recurrence of misconduct.
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 guideline; i.e., that a sanction below the recommended range, or no sanction at all, is appropriate. Conversely, Adjudicators may determine that egregious misconduct requires the imposition of sanctions above or otherwise outside of a recommended range. For instance, in an egregious case, Adjudicators may consider barring an individual respondent and/ or expelling a respondent member firm, regardless of whether the individual guidelines applicable to the case recommend a bar and/or expulsion or other less severe sanctions. Adjudicators must always exercise judgment and discretion and consider appropriate aggravating and mitigating factors in determining remedial sanctions in each case. In addition, whether the sanctions are within or outside of the recommended range, Adjudicators must identify the basis for the sanctions imposed.
4. Aggregation or "batching" of violations may be appropriate for purposes of determining sanctions in disciplinary proceedings. The range of monetary sanctions in each case may be applied in the aggregate for similar types of violations rather than per individual violation. For example, it may be appropriate to aggregate similar violations if: (a) the violative conduct was unintentional or negligent (i.e., did not involve manipulative, fraudulent or deceptive intent); (b) the conduct did not result in injury to public investors or, in cases involving injury to the public, if restitution was made; or (c) the violations resulted from a single systemic problem or cause that has been corrected.
Depending on the facts and circumstances of a case, however, multiple violations may be treated individually such that a sanction is imposed for each violation. In addition, numerous, similar violations may warrant higher sanctions, since the existence of multiple violations may be treated as an aggravating factor.
5. Where appropriate to remediate misconduct, Adjudicators should order restitution and/or rescission. Restitution is a traditional remedy used to restore the status quo ante where a victim otherwise would unjustly suffer loss. Adjudicators may determine that restitution is an appropriate sanction where necessary to remediate misconduct. Adjudicators may order restitution when an identifiable person, member firm or other party has suffered a quantifiable loss proximately caused by a respondent's misconduct.4 Adjudicators should calculate orders of restitution based on the actual amount of the loss sustained by a person, member firm or other party, as demonstrated by the evidence. Orders of restitution may exceed the amount of the respondent's ill-gotten gain. Restitution orders must include a description of the Adjudicator's method of calculation.
When a member firm has compensated a customer or other party for losses caused by an individual respondent's misconduct, Adjudicators may order that the individual respondent pay restitution to the firm.
Where appropriate, Adjudicators may order that a respondent offer rescission to an injured party.
6. To remediate misconduct, Adjudicators should consider a respondent's ill-gotten gain when determining an appropriate remedy. In cases in which the record demonstrates that the respondent obtained a financial benefit4 from his or her misconduct, where appropriate to remediate misconduct, Adjudicators may require the disgorgement of such ill-gotten gain by ordering disgorgement of some or all of the financial benefit derived, directly or indirectly.5 In appropriate cases, Adjudicators may order that the respondent's ill-gotten gain be disgorged and that the financial benefit, directly and indirectly, derived by the respondent be used to redress harms suffered by customers. In cases in which the respondent's ill-gotten gain is ordered to be disgorged to FINRA, and FINRA collects the full amount of the disgorgement order, FINRA's routine practice is to contribute the amount collected to the FINRA Investor Education Foundation.
7. Where appropriate, Adjudicators should consider sanctions previously imposed by other regulators or previous corrective action imposed by a firm on an individual respondent based on the same conduct. A final action by another regulator against an individual respondent for the same conduct is a potentially mitigating circumstance. When Adjudicators consider a respondent's claim of sanctions imposed by another regulator, the respondent must show that the conduct at issue before the other regulator was essentially identical and that any fine has already been fully paid, any suspension has been fully served, and any other sanction has been satisfactorily completed. When another regulator's sanction applies to misconduct that is not substantially similar to violations found by FINRA, Adjudicators should accord commensurately less mitigative weight, if any, based on their assessment of the extent of the overlap between the two cases.
For an individual respondent, Adjudicators should acknowledge firms that address an individual's misconduct by taking corrective action. A firm-imposed fine or suspension is most comparable to FINRA-imposed sanctions when FINRA's sanctions would have also included a fine or suspension, and Adjudicators should consider according some mitigative weight where these firm-imposed sanctions have already been fully satisfied by a respondent. With regard to a firm's prior termination of the respondent's employment based on the same conduct at issue in a subsequent FINRA disciplinary proceeding, Adjudicators should consider whether a respondent has demonstrated that the termination qualifies for any mitigative value, keeping in mind the goals of investor protection and maintaining high standards of business conduct. Among other things, the respondent has the burden to prove that a firm's termination of the respondent's employment has materially reduced the likelihood of misconduct in the future. In cases where a respondent's misconduct is serious, Adjudicators may find-even considering a firm's prior termination of the respondent's employment for the same misconduct at issue-that there is no guarantee of changed behavior and therefore may impose the sanction of a bar.6 FINRA has determined that how long a respondent takes to regain employment, loss of salary, and other impacts of an employment termination are merely collateral consequences of being terminated and should not be considered as mitigating by Adjudicators.7
8. Where appropriate, Adjudicators should require a respondent to requalify in any or all capacities. The remedial purpose of disciplinary sanctions may be served by requiring an individual respondent to requalify by examination as a condition of continued employment in the securities industry. Such a sanction may be imposed when Adjudicators find that a respondent's actions have demonstrated a lack of knowledge or familiarity with the rules and laws governing the securities industry.
9. When raised by a respondent, Adjudicators are required to consider ability to pay in connection with the imposition, reduction or waiver of a fine or restitution. Adjudicators are required to consider a respondent's bona fide inability to pay when imposing a fine or ordering restitution. The burden is on the respondent to raise the issue of inability to pay and to provide evidence thereof.8 If a respondent does not raise the issue of inability to pay during the initial consideration of a matter before "trial-level" Adjudicators, Adjudicators considering the matter on appeal generally will presume the issue of inability to pay to have been waived (unless the inability to pay is alleged to have resulted from a subsequent change in circumstances). Adjudicators should require respondents who raise the issue of inability to pay to document their financial status through the use of standard documents that FINRA staff can provide. Proof of inability to pay need not result in a reduction or waiver of a fine, restitution or disgorgement order, but could instead result in the imposition of an installment payment plan or another alternate payment option. In cases in which Adjudicators modify a monetary sanction based on a bona fide inability to pay, the written decision should so indicate. Although Adjudicators must consider a respondent's bona fide inability to pay when the issue is raised by a respondent, monetary sanctions imposed on member firms need not be related to or limited by the firm's required minimum net capital.
1. See, e.g., Dep't of Enforcement v. Murray, Complaint No. 2008016437801, 2012 FINRA Discip. LEXIS 64, at *31 (FINRA OHO Oct. 25, 2012) (finding that respondent's disregard of his supervisory duties supported sanctions above the range recommended by the Sanction Guidelines), aff'd, 2013 FINRA Discip. LEXIS 33, at *5 (FINRA NAC Dec. 17, 2013).
2. Adjudicators may consider a firm's small size in connection with the imposition of sanctions with respect to rule violations involving negligence. With respect to violations involving fraudulent, willful or reckless misconduct, Adjudicators should consider whether, given the totality of the circumstances involved, it is appropriate to consider a firm's small size and may determine that, given the egregious nature of the fraudulent activity, firm size will not be considered in connection with sanctions.
3. Separately, if a respondent is seeking to expunge customer dispute information from CRD pursuant to FINRA Rule 12805 that reflects an arbitration award or arbitration settlement and that request is pending, or a respondent has petitioned a court of competent jurisdiction to confirm an arbitration award containing expungement relief pursuant to FINRA Rule 2080 and the court has not yet issued an order confirming the arbitration award, adjudicators may consider these additional facts in evaluating if a pattern exists.
4. Other avenues, such as arbitration, are available to injured customers as a means to redress grievances.
5. "Financial benefit" includes any commissions, concessions, revenues, profits, gains, compensation, income, fees, other remuneration, or other benefits the respondent received, directly or indirectly, as a result of the misconduct.
6. Certain guidelines specifically recommend that Adjudicators consider ordering disgorgement in addition to a fine. These guidelines are singled out because they involve violations in which financial benefit occurs most frequently. These specific references should not be read to imply that it is less important or desirable to order disgorgement of ill-gotten gain in other instances. The concept of ordering disgorgement of ill-gotten gain is important and, if appropriate to remediate misconduct, may be considered in all cases whether or not the concept is specifically referenced in the applicable guideline.
7. See Denise M. Olson, Exchange Act Release No. 75837 (Sept. 3, 2015).
8. See Kent M. Houston, Exchange Act Release No. 71584 (Feb. 20, 2014).
9. See In re Toney L. Reed, Exchange Act Rel. No. 37572 (August 14, 1996), wherein the Securities and Exchange Commission directed FINRA to consider financial ability to pay when ordering restitution. In these guidelines, the NAC has explained its understanding of the Commission's directives to FINRA based on the Reed decision and other Commission decisions.
