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Regulatory Updates: More FINRA fines and suspensions for unauthorized text communications


Sanctions for failure to archive text messages is a new FINRA enforcement action trend. In March, FINRA fined and suspended another broker. So far, the regulator has fined and suspended three brokers since the end of 2016 for using text messaging to communicate with clients.

Text Message Fines and Suspensions

FINRA issued a $5,000 fine and suspended a broker from association with any FINRA member in any capacity for one month, after FINRA determined the broker engaged in unapproved securities-related communications with two customers via text message, violating the firm’s WSP. The firm did not capture, review or retain the broker’s text message communications.

This is the third fine this year that points to a FINRA trend in 2017: brokers will be fined for using communication tools outside of their firm’s WSP.

FINRA enforcement is now requesting text message records in connection with audits. If your firm only archives email, it is at risk. It’s not realistic to believe that your firm’s broker-dealers don’t use text messaging to communicate with clients. Smarsh recommends that clients archive all business communications, including text messages, social media posts, instant messages, email, and other emerging platforms.

Supervision and Books and Records Fines

Also in March, two firms were penalized for failure to comply with FINRA Supervision Rule 3110. In both cases, each firm failed to conduct and document review of its electronic communications in a thorough and timely manner.

One firm was censured and fined $125,000 because it failed to adequately conduct reviews or document its reviews of emails that employees sent and received.

A second firm was censured and fined $120,000 for failure to perform a random review and document the process of the review. In addition, the supervision review was not subject to any reasonable percentage sampling requirements, and did not use any risk-based criteria or lexicon-based filters to provide oversight of communications.

FINRA also continues to penalize firms that fail to comply with FINRA Supervision Rule 3110 and SEC Rule 17a-4, Electronic Storage of Broker-Dealer Records.

If your firm does not archive all electronic communications, 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.

To help mitigate risk, The Archiving Platform from Smarsh has Policies and Supervision features that allows firms to implement automated lexicon policies. By fine-tuning lexicon policies, the Smarsh Archiving Platform can reduce the number of false positives by 60%. That means that your compliance team can focus its attention on the real risks. You can even create lexicons 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.

Lexicon policies also further enhance your supervisory control policies and procedures. Lexicon policies can help test and verify that your firm’s supervisory procedures are reasonably designed to achieve compliance with the applicable regulations and FINRA rules. These policies will help you meet FINRA requirements for risk-based review, and ensure your reviewers only review high-risk messages. In addition, all supervision activities are automatically logged, and you can provide your firm’s log report to FINRA to document your compliance.

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.