Just because the holiday season is over, doesn’t mean FINRA has been letting firms and individuals escape landing on Santa’s dreaded “naughty list” for 2019. Recently, FINRA sanctioned a firm and a broker for violations of recordkeeping and supervision regulations.
Let’s take a quick look at these examples.
Firm Fined for Supervision Failure
FINRA fined a firm $800,000 and required the firm to retain an independent consultant to conduct a comprehensive review of the adequacy of its policies, systems and procedures (written and otherwise), staffing, and training relating to the violations identified in the Letter of Acceptance, Waiver, and Consent (AWC).
Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish a reasonably-designed supervisory system with respect to numerous areas of its business. The findings stated that in large part, the firm’s supervisory deficiencies stemmed from its failure to devote sufficient resources to the supervision of its personnel. The firm failed to establish and maintain a supervisory system reasonably designed to ensure that its representatives’ securities recommendations were suitable and in compliance with the applicable securities laws, regulations, and rules. The firm did not employ enough supervising principals and did not provide supervising principals with sufficient tools or exception reports designed to identify patterns of potentially unsuitable trading.
Supervising principals were expected to conduct suitability reviews through a manual review of the daily trade blotter. However, the firm’s procedures did not provide any guidance to supervisors on how they should conduct this manual review. FINRA found that the firm failed to retain and review business related emails for representatives who disclosed personal email addresses that they used for firm business.
Massive Broker Fine for Recordkeeping Violation
A broker was barred from association with any FINRA member in all capacities and ordered to pay $961,781, plus interest, in restitution to customers. The sanctions were based on findings that the broker made false and misleading statements in connection with purchases and sales of securities in willful violation of Section 10(b) of the Securities and Exchange Act of 1934, and Exchange Act Rule 10b-5, as well as FINRA Rules 2020 and 2010. Additionally, the findings found that the broker caused his broker-dealer firm to violate FINRA’s applicable books and records rules by failing to preserve customer emails, text messages, facsimiles, and account summaries that he created for and sent to some customers.
Firms are obligated to retain records of digital communications that relate to their “business as such” as required by Rule 17a-4(b). A safe approach to compliance for electronic recordkeeping rules is to implement an “archive everything” strategy. Firms need to be aware of current requirements for monitoring and supervision of the electronic communications environment to review for conduct and capture for any misconduct. It’s critical to archive all business communications sent to, and received by, their brokers, whether those brokers communicate via email, social media, text messaging, instant messages, or other forms of electronic communication.
Electronic communications must be easily accessible, indexed, and stored on non-erasable and non-rewriteable media as required by Rule 17a-4(f). Engage an archiving vendor that is compliant with the regulatory rules and has the technical ability to capture messaging data including those on popular apps and tools like Facebook, Slack, LinkedIn, Twitter, and text messages. Make sure to select a vendor solution with supervision capabilities such as flagging keyword lexicons and reporting options.
Your firm’s Written Supervisory Policies (WSPs) must be tailored to the unique risks of the firm and reflect all the activity in which your firm engages.
At a minimum, the firm’s WSPs should identify the designated responsible supervisor, describe the process the supervisor will follow to conduct each review, how frequently such actions will be taken, and how the supervisor will document that the required supervisory steps were taken. WSPs should be updated to reflect changes to regulations, and when changes are made to the supervisory process. The firm must ensure the policies are properly enforced and followed by the designated reviewers. And finally, the firm must ensure policy guidelines and permitted communication channels are clearly communicated to employees.
New advancements in archiving technology and solutions make a comprehensive supervision workflow easy and efficient, so brokers can more productively communicate with customers while remaining in compliance. If your firm is not collecting all the communications of your brokers (including text and IM), and if your firm does not have a WSP that accurately and adequately supervises those communications, your firm is at risk for fines.
Marianna Shafir is Corporate Counsel and Regulatory Advisor at Smarsh, where she’s responsible for legal and regulatory affairs worldwide. She helps clients navigate compliance obligations, technology trends and industry regulations through her knowledge of best practices for electronics communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco in varying legal and compliance roles.