FINRA Fines Firm for Failure to Follow Phone Taping Rule
FINRA fined a firm $45,000 and required the firm to retain one or more qualified independent consultants to conduct a comprehensive review of the adequacy of its compliance with FINRA Rule 3170, the Taping Rule, which requires firms to establish, enforce, and maintain written procedures supervising telemarketing activities of all its broker-dealers. The firm is required to comply voluntarily with the Taping Rule for an additional 18 months.
The CCO was fined $10,000 and suspended from association with any FINRA member in any principal capacity for 30 business days. FINRA ruled that the firm failed to comply with the Taping Rule, failed to reasonably enforce its Taping Rule procedures, and later, that the firm and the CCO failed to enforce its revised Taping Rule WSPs. The findings stated that the firm’s WSPs were not reasonably designed to ensure compliance with the Taping Rule and, in any event, the firm failed to tape all conversations as required under the Taping Rule.
When the firm revised its Taping Rule WSPs, the CCO became the designated principal responsible for implementing them; however, the firm and CCO failed to enforce it. As a result, the firm failed to record all telephone conversations between its registered persons and its existing and potential customers.
Failure to reasonably supervise representative on heightened supervision
A broker was fined $5,000 and suspended from association with any FINRA member in any principal capacity for 60 days. The broker failed to reasonably supervise a registered representative at his member firm who excessively traded customer accounts and was on heightened supervision.
The findings stated that the broker was responsible for implementing the additional supervisory guidelines as detailed in the representative’s heightened supervision plan. The broker did not pre-approve all customer orders the representative submitted as required by the plan, and he did not otherwise follow the firm’s procedures to review for excessive trading and churning. Soon after the representative took over the accounts for the customers, both accounts began to appear on the firm’s active account report over multiple months. The firm’s active account report included the amount of commission, number of trades and activity levels, which indicated excessive trading.
The broker also failed to follow up on other red flags. The broker was aware that one of the customers was 81 years old at account opening. The customer’s new account documentation showed an investment objective of growth and income, the account had a high level of activity. Rather than investigate the suitability of the transactions or confirm with the customer, the broker relied on the representative’s representation that the investment objective was speculation.
In addition, the broker was copied on customer email correspondence questioning the representative’s trading. The broker failed to follow up with the customer or the representative regarding the issues raised in the emails.
Broker authorizes wire transfers to hacker posing as customer
Another broker was fined $7,500 and suspended from association with any FINRA member in all capacities for 45 days. The broker consented to the sanctions and to the entry of findings that he caused his member firm to have inaccurate books and records, and that he executed transactions in his customer’s account without the customer’s knowledge or authorization.
The findings stated that a hacker, who had gained access to a firm customer’s account, sent emails to the broker, the customer’s representative, requesting that he effectuate wire transfers totaling $511,870 from the customer’s account to outside bank accounts. The broker was unaware that an imposter sent the emails. The broker complied with the requests and directed that the wires be transmitted. The broker falsely advised his sales assistant that he had received verbal confirmation for the wire transfers from the customer and the sales assistant entered that false information into the firm’s wire request attestation forms.
The findings also stated that to fund the wire transfer requests, the broker executed sales of securities in the customer’s account in a total amount of $525,896, without the customer’s knowledge or authorization. The firm reimbursed the customer.
FINRA’s 2020 Exam priorities highlighted a focus on Trading Authorization. FINRA will assess whether firms maintain reasonably designed supervisory systems relating to trading authorization, discretionary accounts and key transaction descriptors, such as solicitation indicators. FINRA will review whether firms have reasonably designed supervisory systems to detect and address registered representatives exercising discretion without written authorization from the client, as required under FINRA Rule 3260 (Discretionary Accounts).
FINRA may take the following factors, among others, into consideration when reviewing your firm’s procedures and controls:
• How does your firm surveil for potential red flags of registered representatives exercising discretion without written authorization?
• Do your firm’s supervisors know the types of red flags that may indicate that registered representatives are exercising discretion without written authorization (e.g., trading in unrelated accounts in the same security in a certain time period, large numbers of trade reneges in the same security in a certain time period)?
• If a red flag is identified, what follow-up steps do your supervisors take to investigate them further (e.g., phone log, email or other digital communication reviews to look for evidence of communications between the customer and the registered representative; non-complaining customer reach-outs)?
• How does your firm identify instances where registered representatives may be marking trades as unsolicited even though they are, in fact, solicited?
Not following up on red flags will get firms and brokers in hot water with FINRA. Make sure to police for potential red flags and take the appropriate steps necessary to address the issues.
Moreover, firms subject to the taping rule must record all telephone conversations, including mobile phone calls. The Taping Rule includes a requirement to record conversations when firms have hired more than a specified percentage of broker-dealers from firms that have been expelled or that have had their broker-dealer registrations revoked for violations of sales practice rules ("disciplined firms"). The Taping Rule applies to broker-dealers with a troubled history and firms that hire such individuals in large numbers.
The procedures require recording all telephone conversations, including mobile phone calls, between the taping firm's broker-dealers and both existing and potential customers. The Taping Rule also requires that the recordings are monitored and reviewed to ensure compliance with applicable FINRA rules and securities laws and regulations. The procedures must be appropriate for the taping firm's business, size, structure, and customers, and shall be maintained for a period of three years from the date that the taping firm establishes and implements the procedures. By the 30th day of the month following the end of each calendar quarter, the taping firm shall submit to FINRA a report on the supervision of the telemarketing activities of its registered persons.
Firms that need to comply with the Taping Rule should partner with a provider that is equipped to capture, retain and play back relevant phone conversations, like Smarsh. Voice content (captured from virtually any recording system) is available in the archive alongside email, text messages, collaboration content and more than 80 channels of electronic communication.
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