As reported on March 13, 2013, in Sutherland’s annual analysis of FINRA’s disciplinary actions, cases involving research analysts and research reports generated the third-highest amount of fines for the regulator in 2012.1 FINRA reported $12.4 million in fines from 13 research report and research analyst cases in 2012. Even though the number of cases reported declined slightly this past year, the amount of fines assessed in these cases increased by more than 700% compared to 2011.2 This substantial jump in fines caused this category to appear on Sutherland’s Top Enforcement Issues list for the first time in 2012. This Sutherland FINRA Focus delves into the regulator’s recent enforcement actions and highlights a few of the key 2012 research report and research analyst cases.
The chart below indicates the total number of enforcement actions and fines that FINRA has reported during each of the past seven years for research report and research analyst cases.
FINRA’s Research Report and Research Analyst Sanctions Statistics, 2006 – 2012
Total FINRA Fines
While these statistics show that research report and research analyst cases have consistently yielded $1 million to $3 million in fines per year for FINRA, the number of cases filed has mostly decreased in recent years. The incredible jump in 2012 fines is due to a single case where FINRA imposed an $11 million fine, which was the largest fine assessed in 2012. If that case is removed from the analysis, the fines imposed in research report and research analyst cases in 2012 would be consistent with FINRA’s track record over the past seven years. Thus, this huge spike in 2012 fines may be an aberration, rather than evidence that FINRA is making research report and research analyst issues a top enforcement priority.
The 2012 case that resulted in an $11 million FINRA fine involved allegedly improper communications about research analyst ratings.3 FINRA found that the firm failed to properly supervise research analyst communications with firm traders and clients. Additionally, FINRA noted that the firm failed to monitor trading activity before published research changes to prevent and detect potential breaches by research analysts. The firm had created weekly “trading huddles” where research analysts met to share ideas with the firm’s traders. In these huddles, analysts would discuss changing the published research ratings for specific securities. High priority clients could participate in these huddles and often received news about these upcoming research changes from the firm’s analysts. Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said the firm’s “trading huddles created an environment of heightened risk in which material non-public information concerning analysts' published research could be disclosed to its clients. In addition, the firm did not have an adequate system in place to monitor client trading in advance of changes in its published research.”4 Not only did the firm have to pay an $11 million fine to FINRA, it was also required to pay an additional $11 million penalty to the Securities and Exchange Commission.
Another firm was fined $725,000 when FINRA found that it had failed to disclose conflicts of interest in its research reports and during research analysts’ public appearances.5 FINRA alleged that the firm failed to make sufficient disclosures in research reports over a period of more than three years. Although the firm managed public securities offerings, received investment banking revenue from these offerings, and made a market in these securities, it did not disclose these facts in its research reports. Likewise, when the firm’s research analysts made public appearances and discussed the offerings at issue, they did not disclose these potential conflicts of interest. Although the firm asserted that these problems were partially due to technical issues in a disclosure database, FINRA still imposed a $725,000 fine.6 Mr. Bennett noted that the firm “failed to make required conflict of interest disclosures which prevented investors from being aware of potential biases in its research recommendations.”7 He emphasized that “[f]irms need to provide investors with full and accurate information so they will be able to take it into consideration before making an investment decision.”8
Although research analyst and research report cases have not traditionally been a key enforcement area for FINRA, these cases demonstrate that the regulator takes these issues very seriously. Although a case that results in fines of $22 million is rare, it may lead firms to review their policies on research reports and research analyst communications and determine whether their supervisory procedures are sufficient.
1Annual Sutherland Analysis of FINRA Sanctions Shows Number of Enforcement Actions Rises Slightly in 2012, Fines Jump by 15% Tomorrow, Sutherland will release an analysis of FINRA’s 2012 advertising cases. Sutherland released a FINRA Focus for 2012’s suitability cases on March 14 and one for 2012’s due diligence cases on March 15.
2 The number of cases reported and the amount of corresponding fines come from the Disciplinary and Other FINRA Actions report that FINRA publishes each month. Many of these cases also involved other allegations, making it difficult to attribute the exact amount of any particular fine to an alleged research report and research analyst violation.
3FINRA News Release, April 12, 2012, available at http://www.finra.org/Newsroom/NewsReleases/2012/P125974.
5FINRA News Release, January 18, 2012, available at http://www.finra.org/Newsroom/NewsReleases/2012/P125369.
6 FINRA Letter of Acceptance, Waiver, and Consent, January 18, 2012, No. 20080123101.
- Financial Technical Analysis