FINRA Fines For False Advertising Quadruple


The Financial Industry Regulatory Authority (FINRA) reported that fines for false advertising have more than quadrupled from $4.75 million in 2010 to $21.1 million in 2011. FINRA found that a big part of that problem involved inaccurate or fraudulent internal communications. Firms were misleading their own brokers by telling them that structured products and other securities were not risky when, in fact, they were very risky. The brokers would then unintentionally mislead their customers by passing along the false information supplied by their firms. (“Finra enforcement actions, fines way up,” InvestmentNews).

In addition, fines more than doubled for suitability violations from $3.75 million in 2010 to $7.7 million in 2011. The number of enforcement actions also doubled. The suitability violations often involved structured products. FINRA is reportedly looking at whether firms are satisfying the two-prong requirement that (1) the firm and brokers perform proper due diligence to determine whether a product is suitable for investors in a general sense, and (2) whether it is a suitable recommendation for each particular purchaser.

Finally, FINRA is said to be placing increased scrutiny on microcap securities and private (Reg D) offerings, many of which have involved non-traded REITs.

FINRA’s executive vice president, Brad Bennett, observed: “If you see products being sold by people who don’t understand them to people who don’t understand them, that’s a supervision and suitability problem. That is a common theme that will underline product cases coming out this year.”

“The cost of doing business incorrectly has to be greater than the cost of doing business correctly, or you give a competitive advantage to a non-compliant firm,” Mr. Bennett added.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.