Increase in FINRA Fines Emphasizes Members’ Need To Observe Suitability and Due Diligence Obligations

by Bianca Olivadoti

Last year, FINRA assessed $78.2 million in fines—a 15% increase from 2011, according to a recent study released by Sutherland Asbill & Brennan LLP.

With a total of 1,541 cases filed, 2012 was the fourth consecutive year of growth in FINRA disciplinary actions.  Suitability and due diligence violations earned clear spots as number one and number two on the list of allegations.

Suitability violations alone accounted for $19.4 million in fines.  In particular, FINRA has focused these suitability cases on complex products, such as real estate investment trusts (REITs), unit investment trusts (UITs), and collateralized mortgage obligations (CMOs).

The increase in these actions has emphasized the need for firms to conduct a thorough suitability analysis before selling products to their customers.  Brokers must make sure to disclose all risks at the point of sale, especially with complex alternative investments.

Likewise, FINRA’s growing emphasis on complex products has caused an explosion in the number of due diligence cases during the past two years.  In 2012, 62 due diligence actions generated $12.8 million in fines.

As long as interest rates stay low, firms will continue to put together alternative investment products with high potential yields.  This may result in suitability and due diligence violations remaining at the top of the list.