by Howard Haykin

A broker-dealer that’s been around since 1977 got tripped up over its supervision of email and it paid the price - a $30K FINRA fine - only the firm’s 4th sanction in its 40-year history, and its first since 2006.

According to FINRA, the firm’s written supervisory procedures (“WSPs”) prohibited registered reps (“RRs”) from using their personal email accounts to conduct firm business. However, from April 2012 through April 2015, the firm’s former CCO allowed certain RRs to use their personal emails for business-related communications so long as such emails were copied to a firm email address for review and retention.

WHAT WENT WRONG?    Basically four things.

First, the firm’s WSPs were not updated to reflect this modification – a fundamental error. FINRA has consistently professed that WSPs are a “living document” that should provide a road map for the supervisory personnel to follow when they conduct reviews. The policies and procedures of a firm’s WSPs must be: (i) updated for changes in rules, regulations, and a firm's lines of business; and, (ii) in lock-step with the actual supervisory procedures conducted by that firm’s supervisory personnel.

Second, at least 3 RRs used personal email addresses to send and/or receive business related emails that were not always copied to the firm.

[FINANCIAL NOTE: FINRA inserts an interesting comment here, noting that "most of these emails were internal firm communications sent from a firm email address to the representatives' personal email addresses and thus were captured by the firm." This would seem to take some of the sting out of FINRA’s criticisms. Instead, FINRA might have approximated the number the emails never captured.]

Third, the firm failed to cover the intended scope of its email review, which required that, on an ongoing basis, 10% of all retail RR emails and 5% of other department emails would be reviewed for "appropriateness of communications" using a random "sampling basis." Instead, less than 1% of the 350,000 emails flagged for review over the 3-year period were reviewed.

Fourth, the apparent violations and discrepancies were never addressed throughout the 3-year period - and probably would not have been addressed had FINRA not intervened. Needless to say, that's way too long a time especially for a broker-dealer with a relatively clean track record.

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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043355601.