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.
According to Robert Wayne Pearce, a Florida-based securities attorney, "the fines represent an infinitesimally small fraction of the damages caused to investors and no big deal!"
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. "So why didn't FINRA fine them billions last year," Mr. Pearce queries.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at email@example.com for answers to any of your questions about this blog post and/or any related matter.