This year’s Regulatory Roundup highlights how the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) cracked down on regulatory failures in record numbers. And what regulated industries can expect — and prepare for — in the coming year.
- Marianna Shafir, Regulatory Advisor at Smarsh
- Brian Rubin, Co-Head of Litigation and Co-Head of Securities Enforcement at Eversheds Sutherland
- Amanda Oliviera, Litigation Associate at Eversheds Sutherland
SEC record-breaking enforcements 2022 (year over year)
The SEC enforcement results, released on November 15, 2022, were record-breaking due to both the number of enforcements issued and the size of the fines assessed. The agency announced the following numbers:
- 6.5% increase in the total number of enforcement actions
- 20% increase in actions against broker-dealers in FY 2022
- 9% increase in investment adviser and investment company cases
The SEC assessed more than $4.194 billion in penalties in the 2022 fiscal year, a 200% increase from the prior year.
Expect the SEC enforcement posture to continue to be aggressive
The SEC enforcement actions in 2022 were meaningful, targeting high-profile defendants and assessing significant penalties. While collecting a record number of penalties this year, the SEC also assessed its largest fine against an audit firm.
Moving into 2023, Smarsh expect to see additional enforcement in two key areas: admissions and individuals.
The SEC had a high number of required admissions and actions in 2022 — such as the $1.235 billion in fines paid by 16 firms or broker-dealers over alleged widespread and longstanding failures to preserve and maintain work-related text message communications transmitted on employees’ personal devices. The SEC has also required admissions of wrongdoings in several cases involving high-profile firms.
Individual accountability is a pillar of the SEC and FINRA enforcement programs. More than two-thirds of the SEC’s standalone enforcement actions involved at least one individual defendant or respondent in 2022. These individuals included senior public company executives and senior officials in the financial industry. FINRA found individuals in violation in approximately 261 of the 342 actions they brought forth in 2022 — or roughly 76% of the actions.
FINRA’s mid-year enforcement review
FINRA’s enforcement actions were less aggressive this year. Analyzing the data from January through September 2022, FINRA brought 342 enforcement cases, representing a roughly 15% decrease compared to the prior year.
The 2022 numbers were 456 actions, a smaller number than what’s usually extrapolated. The number of cases for 2022 is likely to exceed 456.
In fines this year to date, FINRA has assessed a total of around $30 million. In 2021, this number was $77 million, representing a roughly 60.5% decrease year over year. And 2022’s extrapolated amount for fines collected is $40.5 million versus a more than 50% decrease from $91 million in 2021.
FINRA Trends – Books and Records top category
Books and Records was the top category of FINRA enforcement cases, based on the total number of fines through September. FINRA brought one big case involving books and records issues where the firm failed to retain billions of records in the required WORM (write once, read many) format.
This deficiency affected up to 36 different applications, including those related to accounts payable and receivable, fingerprint records, customer account records, general ledger and trial balances, order and trade tickets, trade confirmations, and wire instructions.
Prepare for the SEC sweep letters
The SEC continues to conduct additional sweeps on many of the same issues — off-channel communications, unsanctioned devices, improper training, a lack of oversight and recordkeeping, and more. For those who haven’t received one of these sweep letters yet, here’s what information the SEC wants you to know:
- Policies and procedures: The SEC will request information about policies and procedures related to communications devices and platforms, including bring-your-own-devices (BYOD)
- Responsible parties: They’ll also ask firms to identify who is responsible for overseeing these policies and procedures, including who’s helping to enforce those policies and procedures and who’s helping with compliance
- Management documentation: Firms will need to provide documentation related to monitoring, testing and review
- Certifications: They’ll want access to documents certifying that employees are in compliance with these policies and procedures
- Compliance training: The SEC will require documents about compliance-related training and reminders
- Violations documentation: Finally, they’ll ask for documents that identify violations and the disciplinary actions that firms have taken
- Self-reporting: The SEC has warned broker-dealers and investment advisers to review their policies and procedures and to self-report non-compliance
Enforcement predictions for 2023
Four main predictions for enforcement actions in 2023:
1. Off-channel communications
Regulators are not only focused on global financial services organizations — they’re also looking at smaller firms. The cases against large firms received a lot of publicity because of the dollar amount size of their penalties, but smaller companies and individuals are being sanctioned too. Off-channel communications played a key role in many cases this past year, making it clear that prohibition policies alone are not enough.
2. Regulation Best Interest (Reg BI)
Brace for increasing enforcement of Reg BI from the SEC and FINRA in the year ahead. The SEC’s first enforcement action marked the beginning of Reg BI’s enforcement and FINRA brought its first Reg BI case this past October. In the future, we expect the SEC and FINRA to bring a wider array of new types of enforcement actions and will look at issues with reasonably available alternatives.
3. Disclosures and conflicts
Over the past few years, we’ve seen dozens of cases dealing with the receipt and disclosure of 12b-1 fees. And we can expect the SEC and FINRA to bring other types of cases where firms had conflicts but didn’t adequately address them.
4. Environmental, social and governance (ESG)
The SEC has increased scrutiny of representations made regarding ESG issues. For example, the SEC charged a firm for failures related to their policies and procedures regarding two mutual funds and one separately managed account strategy marketed as ESG investments.
How to prepare for the year ahead
The regulatory landscape is changing, and enforcement actions are becoming more severe. Here’s what every firm needs to keep up:
- Stay up to date on policies to address new rules and regulations
- Regularly test and audit to ensure policies are followed
- Examine the effectiveness of your technology to keep up with the volume and variety of data
Author: Marianna Shafir Esq. | Regulatory Advisor at Smarsh
About the author:
Marianna Shafir, Regulatory Advisor at Smarsh, is responsible for regulatory affairs worldwide. With her expertise in financial services industry, compliance and e-discovery, Marianna counsels Smarsh clients on meeting regulatory obligations, leveraging technology and guidance on best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco where she was an instrumental member on compliance teams.Marianna has also served as an adjunct professor at New York Career Institute where she taught Law Office Management and Real Estate Law. She earned her Juris Doctorate from Nova Southeastern University. She is a frequent speaker at industry conferences and a contributor to various online publications.
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