In 2015 FINRA increased sanctions dramatically, with a 200% increase in restitution ordered over the course of the year, with issues ranging from administrative or technical issues to failing to meet reporting obligations. In this presentation, Smarsh and law firm Sutherland Asbill and Brennan cover FINRA’s top enforcement issues, emerging trends, and ways to plan for the future.

1. April 28, 2016
WEBINAR
FINRA’s Record-Breaking
Fines and Sanctions of
2015

2. Andrew McCormick
Sutherland Asbill & Brennan LLP
Brian L. Rubin
Sutherland Asbill & Brennan LLP
Mike Pagani
Smarsh

3. Quick
Overview

4. Proliferation of content subject to regulatory compliance
EMAIL
IM
SOCIAL
WEB
MOBILE
VOICE/AUDIO
FILES
VIDEOS
2000 2016
The diversity and complexity of electronic
communications being used continues to
grow year over year
4

5. • Leading Comprehensive Archive Platform
• Focus on Financial Services, Public Sector and other
regulated industries
• Founded in 2001 by CEO Steve Marsh
• Headquartered in Portland, Oregon with offices
throughout the USA and UK/EMEA
• 20,000+ customers with 95% retention
Our company
5

6. Our core offering
• Immutable retention across a broad range of content
types and versions
• Support for over 40 content types across email, IM,
social, mobile, files and web
• Policy-driven compliance and supervision workflows
and use cases
• Powerful search and case management for discovery
workflows and use cases
• Cloud-based SaaS model for rapid deployment and
optimal scalability
• Investment-enhancing professional services and
support for optimized ROI
6
Search Policies
Cases Admin
Core Platform Features

7. Top-tier analyst firms recognize Smarsh and its
offerings as INDUSTRY LEADING
Leader in the 2015 Gartner Magic Quadrant for Enterprise
Information Archiving, and Top 3 placement in 2014 and 2015 Gartner
Critical Capabilities for compliance and e-discovery
Comprehensive Archive Platform solution category designation
for The Archiving Platform™ in the Forrester Research
MARKET OVERVIEW: INFORMATION ARCHIVING, Q2 2015
7

8. What functions are key for our customers
8

9. FINRA’S RECORD-BREAKING
FINES AND SANCTIONS OF 2015
Brian Rubin
Andrew McCormick
Mike Pagani
April 28, 2016

10. • Number of 2015 Cases Filed: 1,462
• 1,397 cases filed in 2014
• 5% increase
• 36% increase in the number of cases since 2008
• Number of firms expelled: 18 in 2014; 25 in 2015; increase of 39%
• Number of individuals barred: 481 in 2014; 492 in 2015; increase of 2%
• Number of individuals suspended: 705 in 2014; 737 in 2015; increase of 5%
2015 FINRA Actions

11. • $94M in fines reported in 2015
• $134M in fines reported in 2014
• 30% decrease in fines
• Second-highest amount of FINRA fines reported since the
financial crisis.
• 236% increase in fines since 2008
2015 FINRA Actions

12. • $96M in restitution reported in 2015
• $32M in restitution reported in 2014
• Increase of 200%
• This is the most restitution FINRA has ever reported.
• Largely driven by sales charge discount cases: 25 reported in
2015, $52M in restitution
• Due to restitution, FINRA’s overall sanctions increased in 2015
• $166M in 2014 to $190M in 2015
• Increase of 14%
2015 FINRA Actions

13. Supersized Fines of $1M+
• 2013: 12 supersized fines, $31M in total fines
• 2014: 25 supersized fines, $100M in total fines
• 2015: 18 supersized fines, $52.2M in total fines
2015 FINRA Actions

14. 2015 TOP FINRA ENFORCEMENT ISSUES
(by total fines)
1. Trade Reporting: $30 million, 159 cases
2. Anti-Money Laundering: $21 million, 36 cases
3. Suitability: $18 million, 76 cases
4. Forms U4, U5, and 3070: $13 million, 154 cases
5. Advertising: $12 million, 36 cases

15. 1. $10M – Firm allegedly had widespread supervisory failures,
including the sales of complex products, fee disclosures, trade
reporting, and confirmation delivery.
2. $7.5M – Firm allegedly failed to effectively monitor the suitability
of customers’ investments in Puerto Rican closed-end funds.
3. $6M – Firm allegedly sold billions of unregistered microcap
securities and AML system was not reasonably designed to detect
suspicious activity regarding microcaps.
4. $3.75M – Firm allegedly executed thousands of unsuitable mutual
fund transactions because it did not have a reasonable
supervisory system; firm’s system did not flag many mutual fund
trades for review and customers did not receive breakpoint
discounts they were owed.
5. $3M – Firm allegedly did not provide accurate “blue sheet” trade
data in an automated format to the SEC and FINRA.
Largest FINRA
Fines of 2015

16. 2015 Top Enforcement Issue:
Trade Reporting
• 2015: $30.3M in fines; 159 cases
• 2014: $11.1M in fines; 176 cases
 Increase of 173% in fines and decrease of 10% in the
number of cases in 2015
• Trade reporting was #5 on Sutherland’s Top FINRA
Enforcement Issues list for 2014 and #2 in 2013.
• The $10M widespread supervision case alleged that trade data
was reported incorrectly for approximately one million trades;
most trade reporting issues were due to technology problems.
• $2.4M fine where firm allegedly failed to accurately report
options positions in nearly 15 million instances; received
cooperation credit (self-reported, hired an independent
consultant, produced the consultant’s report).

17. • 2015: $20.6M in fines; 36 cases
• 2014: $13.2M in fines; 34 cases
 Increases of 56% in fines and 6% in the number of cases in 2015
• AML was #4 on Sutherland’s Top FINRA Enforcement Issues list for
2014.
• The $6M fine case alleged that the firm’s AML program was not
reasonably designed to detect and monitor suspicious activity relating to
microcaps; guidance provided to supervisors, as well as the training and
systems used by the firm, were insufficient. Two individuals were also
fined and suspended.
• $950K fine for allegedly liquidating nearly four billion shares of
unregistered penny stocks; firm did not investigate AML red flags,
including that many deposits of unregistered securities were immediately
followed by liquidations and had no exception reports to address this
issue. Two AML compliance officers were fined and suspended.
2015 Top Enforcement Issue:
Anti-Money Laundering

18. • 2015: $18.3M in fines; 76 cases
• 2014: $5.6M in fines; 75 cases
 Increases of 227% in fines and 1% in the number of cases in 2015
• Suitability cases have historically been a Top Enforcement Issue.
• $7.5M fine for allegedly failing to effectively monitor the suitability of
customers’ investments in Puerto Rican closed-end funds (CEFs)
during a four-year period. FINRA alleged the firm did not adjust its
supervisory system to the unique business needs in Puerto Rico. Firm
also ordered to pay $11M in restitution.
• $3.75M fine for allegedly having an inadequate mutual fund
supervision system during a five-year period. FINRA alleged the firm’s
definition of a mutual fund switch was incorrect in an automated
system, which resulted in thousands of suitability alerts not being
reviewed. Firm also ordered to pay at least $10M in restitution.
2015 Top Enforcement Issue:
Suitability

19. • Cybersecurity appeared on the SEC’s Office of Compliance
Inspections and Examinations (OCIE) list of Exam Priorities for 2016
and FINRA’s Annual Regulatory and Exam Priorities Letter for 2016.
• SEC Chair Mary Jo White: “cybersecurity is the shared responsibility
of all regulators and market participants . . . to guard the broader
financial system against intrusions.”
• The SEC recently brought an enforcement action against a firm that
was the victim of a cyber-attack. This was the SEC’s first
cybersecurity case since the SEC began its cybersecurity sweep in
2014. The firm had implemented certain cybersecurity systems,
procedures and protections and the SEC alleged no evidence that
any information was stolen by the hackers.
• This case may signify that the SEC will apply a strict liability standard
to cybersecurity breaches.
Recent Regulatory Trend:
Cybersecurity

20. Future SEC and FINRA enforcement actions relating to
cybersecurity could address:
 Inadequate responses to breaches
 Inadequate policies and procedures
 Failing to enforce policies and procedures
 Failing to conduct periodic assessments
 Failing to respond to identified deficiencies
 Failing to protect firm networks and customer information
 Failing to have adequate policies, procedures, or
protections regarding vendors and outsourcing
Recent Regulatory Trend:
Cybersecurity (continued)

21. FINRA FINES IN ELECTRONIC COMMUNICATIONS CASES
Recent Regulatory Trend:
Electronic Communications
Fines
Reported
Percentage
Change
Percentage
of Total
FINRA Fines
Cases
Reported
Percentage
Change
2008 $2.7M - 10% 24 -
2009 $3.5M 30% 7% 24 0%
2010 $2.4M (31%) 6% 35 46%
2011 $3.3M 38% 5% 57 63%
2012 $6.5M 97% 9% 63 11%
2013 $19.8M 204% 33% 68 8%
2014 $2.7M (86%) 2% 54 (21%)
2015 $6.2M 130% 7% 64 19%

22. TYPES OF CASES
Retention failures can lead to significant fines.
 A 2013 FINRA case resulted in a $7.5M fine for alleged systemic email retention
failures. Allegations that the firm could not access hundreds of millions of emails,
failed to review tens of millions of emails, and misled FINRA during the
investigation. Firm ordered to pay $1.5M to litigants who may have been impacted
by these email issues.
Retention systems must be WORM compliant
 A 2015 FINRA case resulted in a $2.6M fine for allegedly failing to retain 168
million automated outgoing emails and other electronic records in non-rewriteable,
non-erasable “WORM” (“Write-Once, Read-Many”) format. The firm did not have a
centralized document retention process.
 A 2006 SEC case resulted in a $2.5M penalty for allegedly failing to preserve
emails in a WORM format because emails could be deleted before they were
saved to backup tapes.
 A 2005 SEC case resulted in $2.1M in penalties for allegedly failing to preserve
the email backup tapes in a WORM format. Additionally, the firm could not locate
some backup tapes when responding to the SEC’s requests for emails.
Recent Regulatory Trend:
Electronic Communications
(continued)

23. TYPES OF CASES
Unique categories of emails must also be retained.
 A 2013 FINRA case resulted in a $1.2M fine for five affiliated firms for
allegedly failing to retain unique categories of emails, including BCC emails,
emails to distribution lists, emails to/from alternate addresses, and encrypted
emails.
Firms must also retain instant messages.
 A 2013 FINRA case resulted in a $3.75M fine for allegations that the firm did
not retain electronic records in a WORM format over a 10-year period,
including trade confirmations, email attachments, and 3.3 million Bloomberg
instant messages.
Lexicon search terms should be robust and relevant.
 A 2013 FINRA case resulted in a $100,000 fine for allegations that the
surveillance software used by the firm did not flag emails containing language
such as “no principal risk,” “completely liquid,” and “principal protection.”
Recent Regulatory Trend:
Electronic Communications
(continued)

24. TYPES OF CASES
Mobile devices should be configured properly.
 A 2014 FINRA case resulted in a $275,000 fine for allegations that emails
sent from Blackberry devices to recipients outside the firm were not retained.
FINRA also alleged that no Blackberry messages were retained.
Software must be properly configured.
 A 2014 FINRA case resulted in a $250,000 fine for allegations that the firm
did not subject 12.6M DBA emails to a surveillance review due to
technological problems with a software update. FINRA also alleged that the
firm did not perform regular testing to make sure the surveillance system was
working properly.
Recent Regulatory Trend:
Electronic Communications
(continued)

25. • Trade reporting, anti-money laundering, and suitability will
likely be big enforcement issues again.
• Regulators will focus on firm culture. It is unclear what this will
look like or how it will be enforced, but firms should be
prepared to address this issue in examinations, sweeps, and
discovery requests.
• Share class issues will be a key focus for regulators.
• Restitution will continue to play an increased role in
enforcement actions.
What to Expect in 2016
and Beyond?

27. Value of archived content beyond compliance
27

28. What benefits do our customers experience
28

29. 29
What benefits do our customers experience

30. 30
What benefits do our customers experience

31. Thank you!