More Wall Street Sweeps Focus on Off-channel Communications
A FINRA brokerage firm was fined $1,500,000 for failure to preserve and reasonably supervise its employees’ business-related text messages.
Senior members of the firm’s management were among the employees who communicated about firm business in text messages on their personal cellphones. The firm’s president and the firm’s director of research routinely exchanged text messages about firm business with each other on their personal cellphones, despite the firm’s prohibition on business-related written communication between investment banking and research personnel. The firm’s president and the firm’s director of research were both personally fined $15,000 each and suspended from FINRA membership for 30 days.
When FINRA was investigating whether the firm’s investment banking personnel improperly influenced the firm’s research coverage, the firm couldn’t produce these text messages. This was a violation of:
- SEC Rule 17(a)
- FINRA Rule 4511
- FINRA Rule 2010
The firm’s management texted business-related messages to each other and others despite:
- The firm’s written supervisory procedures (WSPs) prohibiting employees from doing so
- The firm’s compliance department discussing this prohibition with employees several times each year
But the firm did not take reasonable steps to prevent those communications. The firm therefore failed to enforce its WSPs.
In addition, the firm took no steps to preserve or review its employees’ text messages, so it could reasonably supervise them. The firm also failed to reasonably supervise its employees’ email communications.
The firm’s WSPs also didn’t reasonably describe or address:
- The type or scope of reviews to be conducted
- Who at the firm was responsible for conducting the reviews
- How and under what circumstances any concerning email should be escalated
As a result, the scope and substance of the firm’s email review was unreasonable, and the review often did not occur for more than a year after an email was sent or received. Therefore, the firm also violated FINRA Rules 3110(a), (b)(1), and (b)(4) and 2010.
Individual brokers fined
FINRA fined a broker $7,500 for using an unapproved communication platform to conduct securities business. The broker texted one of his customers using his private phone number. The messages concerned securities business, including inter alia, discussions about investment choices, account performance, and completing firm forms.
Because the text messages were not done through an approved firm platform, they were not captured, supervised, or retained by the firm. In addition, the broker inaccurately stated in an annual compliance questionnaire that he did not use personal text messages to discuss securities business with customers. The findings also stated the broker exercised discretion in customer accounts without prior written authorization.
In a separate case, a broker was assessed a deferred fine of $7,500. He caused his member firm to maintain incomplete books and records by texting firm customers about securities-related business without the firm’s authorization or approval.
The findings stated that the broker’s text messages included securities recommendations, account performance and transactions, and market events. The broker texted using his personal cell phone — despite lacking authorization and approval to do so — causing the firm to not retain these messages.
In a similar case, a broker was fined $10,000 because he caused his member firm to maintain inaccurate books and records by texting — an unapproved channel — a customer about securities-related business. As a result, the firm did not preserve those communications.
A broker was barred from association with any FINRA member in all capacities. FINRA found that he refused to provide requested information and documents in connection with an investigation into the circumstances giving rise to a Form U5 filed by his member firm. The findings stated that the Form U5 disclosed that the firm had terminated the broker for violating its policies regarding his unapproved use of text messaging and for soliciting equity transactions without a General Securities Representative (Series 7) license.
Another broker was barred from association with any FINRA member in all capacities for similar reasons of refusing to provide requested information in connection with FINRA’s review of a Form U5 filed by his member firm. The form disclosed that he had 14 Disciplinary and Other FINRA Actions and voluntarily resigned while under review for potential violation of company policy related to suitability, unauthorized trades and texting with clients.
Expect harsher fines
Last week, the SEC Commission Chair Gary Gensler told an audience of lawyers that his agency will continue to search for record-keeping violations.
Gensler highlights the actions that led to over $1 billion in fines for some of the nation's largest banks and warned of harsh penalties if regulated entities are caught mismanaging employee communications. This is a warning to all firms that there will be further off-channel communications sweeps.
Best practices to avoid the fines
Firms must establish a reasonable supervisory system for the review of electronic communications. Your firm’s WSPs must be tailored to the 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, including when (i.e., how frequently) such actions will be taken, the escalation process, and how the supervisor will document that review process
- Be updated to reflect changes to regulations
- Be updated when changes are made to the supervisory process
- Mandate timely (daily or weekly) reviews
The regulators have spoken: firms must conduct their business communications within only approved channels, and they must maintain and preserve those communications. Organizations must capture, retain and review employee communications in support of regulatory retention and oversight obligations. The content of the communication determines supervisory requirements; it doesn’t matter if its sent or received on a corporate or personal device.
A prohibition policy won’t save firms from fines if their brokers are communicating with clients over those prohibited channels. If a firm is aware that their brokers are communicating over prohibited channels, the firm is at risk for regulatory violations and fines.
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