Select Broker-Dealer Enforcement Cases and Developments: 2014 Year in Review

February 19, 2015

In a record year for enforcement, the SEC brought a landmark number of cases, and FINRA imposed an exceptional level of fines and restitution.

This LawFlash highlights key U.S. Securities and Exchange Commission (the SEC or the Commission) and Financial Industry Regulatory Authority (FINRA) enforcement developments and cases regarding broker-dealers during fiscal year 2014. The full 2014 Year in Review is available here.


There were few significant personnel changes at the SEC last year. The Commission’s composition was stable in 2014 with Chair Mary Jo White continuing to lead the SEC. The other commissioners are Luis A. Aguilar, Daniel M. Gallagher, Kara M. Stein, and Michael S. Piwowar. Notable changes were made with appointments in two major SEC divisions (Stephen Luparello was named the director of the Division of Trading and Markets, and Stephanie Avakian was named the new deputy director of the Division of Enforcement). New directors were also appointed to lead the Philadelphia and Atlanta regional offices.

The enforcement statistics compiled by the SEC during fiscal year 2014 (which ran from October 1, 2013 through September 30, 2014) set several records. Other aspects of the enforcement program led the Commission to dub fiscal year 2014 “A Year of Firsts.”

In fiscal year 2014, the SEC brought a record 755 cases, a figure likely boosted by the number of open investigations carried over from the prior year. Moreover, the SEC’s actions resulted in a record tally of monetary sanctions being imposed against defendants and respondents.

With respect to its caseload, in what has become a trend, the SEC brought 7% fewer cases against investment advisers and investment companies—130 cases in fiscal year 2014, compared to 140 actions in fiscal year 2013. To contrast, in fiscal year 2014, the SEC reversed its downward trend from fiscal year 2013, bringing 37% more actions against broker-dealers—166 in fiscal year 2014, compared to 121 in fiscal year 2013. Nevertheless, taken together, the SEC continues to devote significant resources to investigating regulated entities: cases in these areas have represented about 39% of the Commission’s docket in each of the last two fiscal years.

After a sharp decline in 2013, the Commission brought 52 insider trading cases in fiscal year 2014, an 18% increase from fiscal year 2013, but this increased number is still lower than the fiscal year 2012 total. We will see in the coming year how changes to the legal landscape may affect the SEC’s enforcement in this particular area.

Turning to monetary sanctions, in fiscal year 2014, the SEC obtained orders requiring the payment of $4.16 billion in penalties and disgorgement, a 22% increase from the amounts ordered in fiscal year 2013 and a record for the Commission. Last year, the SEC obtained orders in judicial and administrative cases that required the payment of approximately $1.378 billion in civil penalties and about $2.788 billion in disgorgement.

The SEC’s Office of the Whistleblower program continued to receive a large number of leads for the Commission’s investigators. Last year, whistleblowers submitted 3,620 tips, complaints, and referrals to the SEC, an increase of 382 (or approximately 11%) from the 3,238 received in fiscal year 2013. This last year, tips, complaints, and referrals came from all 50 states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, and 60 foreign countries. The United Kingdom (70), India (69), and Canada (58) led the way in referring complaints to the SEC from outside the country last year. Most complaints fell into three categories: corporate disclosure and financials (16.9%), offering fraud (16%), and manipulation (15.5%).

During the most recent fiscal year, the Division of Enforcement took 30 cases to trial, twice the number of cases tried in fiscal year 2013. Of those, Commission trial lawyers found themselves in federal courts more in fiscal year 2014 than in the prior 10 years, and more cases were tried to juries than in the previous three years combined. And, although, looking back over time, the SEC can say that it has won about 80% of the cases it has taken to trial, the Commission saw some mixed results at trial in fiscal year 2014. We can anticipate that all of these numbers will continue to climb as the SEC demands more in settlement in the way of sanctions and, in some cases, seeking admissions of wrongdoing, and gives less as waivers from statutory disqualifications become harder to obtain from the Commission.

In fiscal year 2014, the SEC Division of Enforcement pursued a number of creative strategies that allowed it to expand its reach in targeting misconduct. Chair White continues to concentrate the division’s efforts on bringing new and innovative actions to expand the Commission’s footprint and to strengthen the deterrent effect of its enforcement program. The Commission touted a number of first-time cases in areas, including the Market Access Rule, the Dodd-Frank Act’s whistleblower anti-retaliation provisions, books and records, protection of customer information, nonprosecution agreements (the first with an individual), and municipal securities. At the same time, the SEC continued its “broken windows” approach to enforcement and brought cases in connection with what seem like minor violations.

The Commission also continued to demand admissions in certain cases in fiscal year 2014 following Chair White’s announcement of that approach in the prior year. Through November 2014, the Commission reported that it had obtained admissions in more than a dozen actions. Finally, the SEC has been increasingly bringing cases in its own administrative forum; in cases last fiscal year that were partially litigated, about 57% of those actions were reportedly filed in district court with the remaining 43% brought administratively. That approach has brought some criticism and even litigation.

We can anticipate continued focus in the coming year on municipal securities, thanks to several breakthrough actions in this area in fiscal year 2014, as well as the Municipalities Continuing Disclosure Cooperation Initiative. In addition, both the Microcap Fraud Task Force and the Broker-Dealer Task Force, which work across the SEC and with other regulators to coordinate information and expertise, will likely be significant sources of additional enforcement actions in the coming year. The entire enforcement program will no doubt benefit from the Commission’s leveraging of “big data” collected through the examination program, through investigations, and from other sources, as it continues to not only use that data to identify areas of risk, but also analyze the information to try to work smarter in all areas.


An interesting enforcement record emerged at FINRA last year. Although it instituted fewer disciplinary cases in 2014, its fines doubled from the prior year. Moreover, the amount of restitution that FINRA ordered in 2014 more than tripled the amount that had been returned to investors in 2013.

Specifically, in 2014, FINRA brought 1,397 new disciplinary actions, a noticeable decline from the 1,535 cases initiated in 2013. Along the same lines, FINRA resolved 1,110 formal actions last year; 197 fewer cases than it had in the prior year. With respect to penalties and restitution, in 2014, FINRA levied $134 million in fines (versus $60 million in 2013) and ordered $32.3 million to be paid in restitution to harmed investors (versus $9.5 million in 2013).

FINRA’s use of Targeted Examination Letters seems to be declining. In 2014, FINRA posted only two letters on its website, versus three in 2013 and five in 2012. Last year’s letters sought information on cybersecurity threats and order routing/execution quality. (In February 2015, FINRA published its Report on Cybersecurity Practices.)

There were two noteworthy enforcement developments in 2014.

First, in mid-2014, FINRA was criticized by SEC Commissioner Stein and the Wall Street Journal for its alleged failure to impose significant sanctions on brokerage firms and their executives. FINRA rejected those views. Interestingly, as described above, FINRA’s fine levels doubled last year, and it returned more than three times the amount of money than it had in 2013.

At the time of the criticism regarding its enforcement program, FINRA announced that it would review its Sanction Guidelines. According to FINRA, it will focus particularly on repeat offenders and the largest broker-dealers. No timetable was set for the completion of the review.

Second, last year, FINRA announced two new regulatory service and market surveillance arrangements. In February 2014, FINRA announced that it had entered a regulatory service agreement with BATS Global Markets. Under this agreement, FINRA will provide cross-market surveillance services to BATS’ four stock exchanges—BZX, BYX, EDGX, and EDGA, along with certain other regulatory services. This expands FINRA’s cross-market surveillance program to 99% of all U.S. stock market trading. In December 2014, FINRA announced that it had signed an agreement with the Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2) to provide market surveillance, financial surveillance, examinations, investigations, and disciplinary services to CBOE and C2, in addition to other regulatory services. FINRA began performing these services as of January 1, 2015.

Looking ahead, it appears that FINRA will continue to focus its enforcement efforts in several areas, including fraud, misrepresentations, conversion and/or misuse of customer funds (particularly by individual financial advisers dealing with retail customers), anti-money laundering, suitability and supervision of complex products, trade execution and fair pricing, technology and operational issues, and cybersecurity.


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