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Regulatory Update: FINRA Sanctions for May 2017

Two firms penalized for failure to supervise

Two firms were fined in May for failure to comply with FINRA Supervision Rule 3110. In both cases, the firms failed to review their representative’s electronic communications.

The first firm was fined $32,500 for failure to establish and maintain a reasonable supervisory system for the review of electronic communications.

Specifically, the firm failed to review all of its flagged emails. The firm reviewed a random sampling of electronic communications and communications containing default keywords provided by an email review and retention system from a third-party vendor. The messages flagged for review were not based on risks related to the firm’s business, and the firm failed to review all of the flagged emails.

To avoid situations like this, create lexicons with your archiving platform to focus on risks such as insider information, customer complaints, bribery, etc. For example, if a client emails one of your firm’s advisors and says, “You committed fraud,” the email will be flagged to indicate there’s a customer complaint policy violation. These policies will help you meet FINRA requirements for risk-based review and avoid regulatory sanctions.

The firm also failed to capture and review language translation. The findings stated that the firm’s advisors regularly sent and received internal electronic communications in French, but the firm failed to use French keywords to review electronic communications. The firm also failed to perform any review of French-language messages sent and received through any domain that firm personnel used for business purposes. In addition, the firm’s Written Supervisory Procedures (WSPs) for the review of electronic communications were inadequate because they failed to articulate the steps the firm took to address flagged emails. Also, the WSPs did not contain the processes for reviewing electronic communications in French.

Your archiving platform should enable you to capture and review electronic correspondence in all languages. You can create keywords in languages your advisors use, to communicate in every jurisdiction. For example, Smarsh features language translation automated lexicons that capture and flag messages, making it much easier to set up and maintain supervision in various languages.

Finally, the firm failed to retain business-related Instant Messages (IMs) for AOL instant messaging accounts that six registered representatives used to conduct securities-related business. The firm was unable to estimate the number of AOL IMs it failed to retain because the messages were only intermittently captured.

Your archiving platform needs to capture all electronic communications, including IM email, social media, mobile/text messaging and websites. If you are using a comprehensive platform, your compliance team can monitor and store content no matter what device, operating system, or carrier your firm or advisors use. It’s the one archive you need to manage it all.

The second firm was fined $12,500 by FINRA for failing to enforce its WSPs related to email review. The findings stated the firm failed to review its representative’s electronic communications.

Your firm should set up proactive, automated message monitoring and review. Keep track of who is reviewing what, and ensure that your compliance team can track progress and escalate messages that require further scrutiny. Built-in audit trails should show the activities on every message, which helps ensure that you have adequate surveillance of your employees’ electronic communications.

It’s clear FINRA is not slowing down on sanctions, and continues to penalize firms for failure to comply with record retention and supervision requirements.

If your firm does not archive all electronic communications (text messages, social media posts, instant messages, email), conduct risk-based reviews of those communications, and document the review process (or use an automated tool to document the review process), then your firm is at risk for fines. The Archiving Platform and its preset lexicon policies are the solution for firms to avoid regulatory fines and risk.

Click here for more information about lexicon policies.

Marianna Shafir Esq.

Marianna Shafir Esq.

Corporate Counsel, Regulatory Advisor at Smarsh
Marianna Shafir is Corporate Counsel and Regulatory Advisor at Smarsh, where she’s responsible for legal and regulatory affairs worldwide. In addition, she helps Smarsh clients navigate compliance obligations, technology trends, and new industry regulations through her vast knowledge of best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco in varying compliance roles.

Marianna is an adjunct professor and lecturer of Law at New York Career Institute, where she teaches Law Office Management and Real Estate Law. She earned her J.D. at Nova Southeastern University, and a B.B.A. degree in marketing from Baruch College.
Marianna Shafir Esq.