Rolling the Dice on Settlement or Dismissal of SEC and FINRA Charges

Catherine Dunn

Corporate Counsel

08-01-2012

To settle or to litigate? That is the question posed by a new analysis of litigated disciplinary proceedings brought by the Securities and Exchange Commission and FINRA against broker-dealers, registered representatives, and associated persons.

The choice for broker-dealers facing charges is not always so obvious, although trying to reach a settlement—and avoiding litigious entanglement with a regulatory agency—is often tempting. “Generally, when people think about the regulators, they think they won’t have any chance at all,” says Brian Rubin, a partner at Sutherland Asbill & Brennan who led the firm’s annual review [PDF] of these proceedings.

But sometimes respondents do stand a chance at getting a case dismissed or walking away with reduced sanctions, Rubin adds. Respondents “should be thinking long and hard about the issue and not just rolling over,” he says.

Rubin and attorney Jae Yoon studied cases brought by the two regulators between October 2010 and March 2012. They found that, “Of the 126 charges that were litigated by the SEC and FINRA and resulted in SEC initial decisions or FINRA Hearing Panel decisions during the study period, [broker-dealers] and individuals succeeded in getting 12.7 percent of the charges dismissed.”

In the breakdown between SEC and FINRA proceedings (the two agencies have overlapping jurisdiction), respondents to FINRA disciplinary actions fared a lot better, with 14.3 percent of charges dismissed.

It was a different story before the Administrative Law Judge (ALJ) at the SEC: “Only seven respondents litigated against the SEC during the Study Period, and none convinced the ALJ to dismiss any charges.”

Why the difference in dismissal rates? Well, seven cases is not a large pool, Rubin notes. And, he says, “historically the SEC has had a greater success rate than FINRA” once charges make their way to a hearing.

But he also ventures another theory: “It could be that the folks who are litigating against the SEC are going for a ‘Hail Mary’ pass”—and never had a good shot at getting the case dismissed in the first place.

Respondents to FINRA fraud cases, in particular, demonstrated a higher success rate compared to the overall group, getting cases dismissed 22 percent of the time. Fraud is “a harder case to make,” says Rubin, as the regulators have to prove bad intent.

As for monetary sanctions, 28.6 percent of the time SEC respondents convinced ALJs to impose lower monetary sanctions. That’s down from Fiscal Year 2009-2010, when “ALJs lowered monetary sanctions approximately 50 percent of the time,” the study states. 

Again, FINRA respondents had a better go of it. About 33 percent of the time they convinced the agency’s hearing panels to reduce the proposed monetary sanction. That’s an improvement over their 27 percent success rate in FY 2009-2010.

And these reductions were, on average, significant. “When fines were reduced, the proposed fine ranged from $15,000 to $30,000, and averaged $21,250,” this year’s study finds. “The amount ordered ranged from $5,000 to $20,000, and averaged $9,250 (a reduction of approximately 56 percent).”