Recordkeeping & Supervision
Last month, FINRA fined a firm $50,000 for failing to ensure that a non-registered, affiliated individual involved in the management of the firm’s business was properly registered as a principal. The findings stated that the firm was required to review or retain all business-related emails sent from or received through the email accounts at the parent company, but failed to do so. Meanwhile, registered persons periodically used email accounts of its parent company to conduct firm business.
Another brokerage firm was fined $25,000 and required within 90 days of the issuance of the Letter of Acceptance, Waiver and Consent (“AWC”), or such additional period as agreed to by FINRA, to submit a written certification that the firm’s systems, policies and procedures are reasonably designed to achieve compliance with FINRA Rule 3110(b)(6)(C); and required to file with FINRA’s Advertising Regulation Department, for the period of six months from the effective date of the AWC, all new retail communications, as defined in FINRA Rule 2210(a)(5), concerning any variable annuity product, at least 10 business days prior to their first use. Without admitting to or denying wrongdoing, the firm consented to the sanctions and to the entry of findings that it failed to supervise the variable annuity recommendations and related retail communications of one of its registered representatives. The findings stated that the registered representative sent to prospective customers numerous retail communications concerning a variable annuity-based investment strategy that the registered representative had developed. These communications failed to comply with the content standards of FINRA’s advertising rules in multiple respects. Because the firm allowed the registered representative to self-supervise his variable annuity-related activities, the firm failed to identify or prevent these violative communications.
Additionally, a firm was fined $7,500 for maintaining inaccurate financial books and records, filing inaccurate Financial and Operational Combined Uniform Single (FOCUS™) filings, and failing to file timely notifications pursuant to Rule 17a-11 of the Securities Exchange Act of 1934 (Exchange Act). A lower fine was imposed after considering, among other things, the firm’s revenue and financial resources. The findings stated that these violations were the result of the firm’s incorrect classification of assets as “allowable,” the inaccurate treatment of liabilities and revenues resulting from an inadequate expense sharing agreement, and the firm’s failure to enforce its WSPs. The findings also stated that the firm failed to maintain and review certain financial and operations principal’s (FINOP) business-related emails sent to and received from a third-party email account. Consequently, those emails were not maintained in non-rewriteable, non-erasable format. The firm did not have in place an audit system to ensure that the emails were properly maintained, and it did not enforce its WSPs.
If your firm does not archive all business-related 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.
SEC Rule 17a-4 requires broker-dealers to store electronic records in a format that cannot be erased or rewritten and in an archive with the same properties. To comply with this rule, establish firm policies and procedures to capture, retain and supervise all emails, text messages, social media posts, and instant messages – as well as address communications on emerging platforms that have not been approved for business use, such as encrypted text messaging and chat applications. This also includes popular sites such as Facebook, LinkedIn, Twitter, Bloomberg, and Slack. Because firms can’t rely on social networks for recordkeeping, firms need to work with third-party vendors to ensure they are capturing communications made over these channels. And don’t forget to test the firm’s electronic communication channels! This is important to ensure that all content is being captured and is in compliance with recordkeeping rules.
FINRA Rule 3110 provides the Supervisory Framework for broker-dealers. The rule requires broker-dealers to have supervisory procedures in place that are “reasonably designed” to comply with applicable securities laws and regulations. The rule mandates that all broker-dealers establish and maintain supervisory procedures appropriate for the member’s business, size, structure and customers. Rule 3110(b)(6)(C) prohibits supervisory personnel from overseeing their own activities, and reporting to, or having their compensation or continued employment determined by, a person or persons that they are supervising.
Firms should review their supervisory designations to determine if they have any supervisors reviewing their own activities, or situations in which a supervisor's compensation or employment situation is determined by someone he/she is responsible for supervising. If any such situations are identified, the firm will need to revise its supervisory designations to comply with the above regulations.
If your firm hopes to avoid unexpected regulatory fines, you must test, remediate, and enhance any suspected deficiencies related to recordkeeping and supervision. It’s crucial that you undertake all actions necessary before becoming the subject of a regulatory examination.
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