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Regulatory Sanctions

A Firm’s Got to Know Its Limitations … With E-Communications

May 23, 2017

[Photo:  Clint Eastwood, playing 'Dirty Harry' Callahan]


by Howard Haykin


In the 1970’s “Dirty Harry” crime films, Clint Eastwood played a hard-nosed San Francisco cop armed with a six-shot Smith & Wesson revolver. Time and again, after ‘offing’ one of the bad guys, ‘Dirty Harry’ Callahan would say, “A man’s got to know his limitations.” Well, in the securities industry, firms need to know their limitations - and in this case, a firm never fully understood how to organize and supervise electronic communications used by its registered reps – until FINRA examiners came in and found a raft of deficiencies.


Dundee Securities agreed to pay a $32.5K fine to settle FINRA charges it failed to establish and maintain a reasonable supervisory system for the review of electronic communications.


BACKGROUND.    Dundee, a FINRA member firm since 1996, is headquartered in Toronto, Ontario. In March 2016, the Firm had around 40 registered persons who operate in the firm’s main office and in 5 branch offices across Canada. Dundee primarily engages in the purchase and sale of Canadian equities in the secondary market for U.S. institutional investors. The Firm had no relevant disciplinary history.


FINRA FINDINGS.    Between August 2012 and August 2015, Dundee failed to review and retain messages for 6 AOL instant messaging accounts used by its registered reps to conduct securities related business. Based on this conduct, FINRA concluded that Dundee violated the SEC and FINRA rules governing books and records - SEC Rule 17a-4, and FINRA Rules 4511 and 2010.


Instead, FINRA noted that the firm reviewed a random sampling of electronic communications as well as communications containing default keywords provided by a 3rd-party vendor of the email review and retention system the firm utilized.

  • messages flagged for review were not based on risks related to the firm’s business.
  • firm failed to review all of the flagged emails in some manner.
  • registered reps regularly sent and received internal electronic communications in French, but the firm failed to utilize French keywords to review e-communications.
  • firm failed to perform any review of French-language messages sent and received through any domain firm personnel utilized for business purposes.
  • WSPs for the review of e-communications were not adequate, in that they: (i) failed to articulate steps to be taken to address flagged emails; (ii) did not contain processes for reviewing e-communications in French
  • firm failed to retain business-related instant messages (IMs) for AOL instant messaging accounts that 6 registered reps used for firm business.


FINANCIALISH TAKE-AWAY.    FINRA tends to come down hard on firms that cannot readily access books and records. FINRA comes down much harder on firms that haven’t retained those records they are required to maintain. When it comes to overlooking a block of electronic communications – in this case, 6 AOL IM accounts – the fault lies squarely with management.


Next, the firm failed to tailor 3rd-party surveillance programs to their business practices – i.e., tailoring the lexicon of the programs to correspondence written in French.  OOPS!!! 


In both cases, if compliance is not a strong suit of firm management, then that that firm should seek out the services of a consultant, who can provide the necessary surveillance and supervisory policies and procedures. It costs money. But it’s that simple.


This case was reported in FINRA Disciplinary Actions for May 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043279401.