Fines Triple As FINRA Focuses On Suitability

By Juliette Fairley

Fines imposed on the financial services industry more than tripled last year to $18.3 million from $5.6 million in 2015, according to FINRA Suitability Sanctions Statistics.

The increase in penalty fees has some advisors blaming the Department of Labor’s looming fiduciary standard, although two cases were responsible for a large percentage of the total.

“Suitability is becoming an issue now because the Department of Labor is rumored to be implementing severe restrictions on people’s retirement accounts,” said John C. Lindsey, certified financial planner with Lindsey and Lindsey Wealth Management in Westlake Village, California. “Advisors in the lower echelon have been putting people into investments that are inappropriate for their age group.”

It’s not uncommon for commission-based financial advisors to somehow suggest that their older 401(k) plan participants move their savings into an IRA account shortly before they are scheduled to retire.

“When this occurs it’s considered account churning or selecting higher cost investment vehicles that generate handsome commission income without adding any real value to the client,” said Thomas Cote, senior vice president of retirement plan solutions at EQIS Capital Management, a fee-based turnkey asset management platform (TAMP).

“Regulators have indicated an awareness of this problem and have made very clear that they will be monitoring much more closely IRA rollover activity from a 401(k) account,” Cote said.

Suitability cases have historically been a top enforcement issue for FINRA but did not make the list in either 2013 or 2014. One difference is that in 2015 the agency launched a toll-free hotline called the FINRA Securities Helpline for Seniors to provide older consumers with a supportive place to get assistance from knowledgeable FINRA staff.

“Seniors who lost money in the market because they didn’t know their investment would be at risk are complaining to FINRA’s hotline after they lose their principal,” said Linda Riefberg, an attorney who worked with FINRA for 18 years until 2011 when she left to defend brokers under investigation by FINRA.

According to FINRA analysis released by the law firm Sutherland Asbill & Brennan, the increase in the amount of fines is more specifically due to sales of Puerto Rican bond funds. One of these cases resulted in a $7.5 million fine and an order to pay an additional $11 million in restitution.

“FINRA found they didn’t monitor the suitability of those transactions,” said Brian Rubin, partner attorney and head of the SEC, FINRA and State Enforcement Group in Sutherland Asbill & Brennan’s D.C. office.

Another significant 2015 suitability case led to a $3.75 million fine and an order to pay at least $10 million in restitution for allegations regarding the sales of mutual funds. FINRA alleged that during a five-year period a firm’s supervisory systems were insufficient to monitor the suitability of mutual fund sales and switches.

“In general, suitability violations involve a mix of insurance products, such as variable annuities as well as stocks, bonds, mutual funds and alternative investments,” said Rubin.

Consensus among financial advisors is that there should be no more than 50 percent of a person’s retirement account in an annuity unless the client absolutely insists on more however as the boomer population has been aging, more of them are being exposed to alternative investments and a heavy concentration of annuities.

“Advisors that are haphazardly accumulating clients and assets and then plowing them into broad catchment portfolios cannot claim to really be considering the suitability of each of these investments for each client,” said Min Zhang, a chartered financial analyst and former vice president of Asset Allocation Product Management at PIMCO.

Suitability is also more timely today because of interest rates.

“The low interest rate environment is causing firms to develop products that will come up with levels of returns and they are getting creative so it can be sales or some level of risk and if it doesn’t work, there will be an allegation of the investment being unsuitable,” Riefberg said.
As products become more sophisticated, brokers themselves are reportedly struggling to grasp the complexities behind novel investment vehicles.

“If the broker doesn’t understand, they cannot explain it adequately to their customer base,” said Riefberg.

To avoid suitability violations, financial advisors need to understand the products they are selling and be careful how they are representing their products and know their customers to ensure they are meeting their investment objectives.

“At some point, interest rates are going to rise and as a result certain products may not perform the way they were sold or the way representatives and customers thought,” Rubin said, “which could lead to an increase in arbitrations and FINRA enforcement actions.”

Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University’s Graduate School of Journalism. Juliette can be reached at

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