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NEWSLETTERS & ALERTS
FINRA Opens Another Can of WORMS – At Large and Smaller Broker-Dealers
In September and October, FINRA reported disciplinary actions against 3 additional broker-dealers for their respective failures to maintain electronic brokerage records in the required WORM format.
While nothing on FINRA’s web site would indicate that the regulator ever conducted an industry-wide investigation into electronic brokerage record-keeping, the findings and circumstances of all 6 cases are so similar as to suggest that FINRA had, in fact, conducted a targeted or “sweep” examination.
For your reference, the following firms were sanctioned in August: (i) Allianz Life Financial Services, Questar Capital Corporation; (ii) HSBC Securities (USA); and, (iii) MML Distributors, MML Investors Services, MML Strategic Distributors, and OppenheimerFunds Distributor. FINRA hit the firms with $2.4 million in fines, and ordered several of them to conduct a comprehensive review of their respective policies and procedures, along with remedial measures that would lead to full compliance with storage of electronic records.
State Street Global Markets agreed to pay a $1.5 million fine to settle FINRA charges that the firm failed to maintain in WORM format brokerage records pivotal to its business. SSGM further agreed to undertake a comprehensive review of its relevant policies and procedures (written and otherwise), and to provide a description of remedial measures leading to full compliance relating to the conduct addressed in this case.
BACKGROUND. “New SSGM” is based in Boston, MA. and has been a FINRA member since May 2017 – though its predecessor firm, SSGM, had been a FINRA member since 1992. New SSGM has around 128 registered reps and maintains 2 branch offices nationwide. New SSGM came about on 5/1/17 when parent company State Street Corporation split the operations of the predecessor firm into 2 business lines. Substantially all of SSGM’s assets and liabilities, including all its trading businesses and the BlockCross Alternative Trading System, were acquired by “New SSGM.”
FINRA FINDINGS. From November 2011 to April 2017 (the "Relevant Period"), SSGM failed to maintain electronic brokerage records in the WORM format, as required by various SEC, NASD and FINRA rules. During the Relevant Period, SSGM failed to maintain in WORM format approximately 131.5 million records of orders placed by institutional clients.
SSGM further failed to:
► store separately from the original a duplicate copy of electronic records, encompassing approximately: (i) 244.5 million records of orders placed by its customers; (ii) 778,000 records of orders executed by SSGM; and, (iii) up to 52 million electronic communications.
► implement an audit system for the inputting of records in electronic storage media; and,
► maintain adequate WSPs related to its compliance with record retention requirements – i.e., the firm failed to adequately enforce procedures contained in its existing WSPs.
Acorns Securities agreed to pay a $175K fine to settle FINRA charges that it failed to maintain millions of electronic broker-dealer records in WORM format. A lower fine was imposed after considering, among other things, the firm’s revenues and financial resources. Acorns further agreed to undertake a comprehensive review of its relevant policies and procedures (written and otherwise), and to provide a description of remedial measures leading to full compliance relating to the conduct addressed in this case.
BACKGROUND. Acorns is based in Irvine, CA, and has been a FINRA member since March 2014. The Firm is owned by Acorns Grow, Inc. The Firm acts as an introducing broker-dealer for Acorns Advisers, which provides a mobile trading platform allowing customers to invest in a diversified portfolio of ETFs. The Firm has approximately 12 registered reps and one branch office.
FINRA FINDINGS. From March 2014 to present (the "Relevant Period"), Acorns Securities failed to maintain electronic broker-dealer records in the WORM format, as required by various SEC, NASD and FINRA rules. At different times during the Relevant Period, Acorns failed to maintain in WORM format approximately 10 million electronic records in 22 categories of recording, including 8.8 million trade confirmations, 323,000 statements, and 407,000 instant messages.
Acorns further failed to:
► provide the required 90-day notice to FINRA prior to retaining a vendor to provide electronic storage; and,
► have an audit system for those records it failed to maintain in electronic storage media.
POST-SCRIPT. According to FINRA BrokerCheck, certain of Acorns’ books and records are now maintained by the following 3rd parties:
► Amazon Web Services - provides a cloud-based archival service configured to store and retain broker-dealer records in electronic non-erasable and non-rewriteable format in compliance with SEC Rule 17A-4.
► Smarsh - provides email hosting and archiving for Acorns Securities in compliance with SEC Rule 17A-4.
United First Partners agreed to pay a $35K fine to settle FINRA charges that it failed to maintain its electronic communications in the manner required under SEC and FINRA rules.
BACKGROUND. United First Partners is based in New York, NY, and has been a FINRA member since August 2011. The Firm employs approximately 14 registered reps who operate from 3 branch offices, including its New York headquarters. The Firm's primary business is providing brokerage and research services to institutional customers.
FINRA FINDINGS. From February 2013 through July 2013 (the "First Period"), United First used electronic storage media to retain its Firm-domain emails. During this time, the Firm's servers became disconnected from its email retention vendor, preventing regular journaling of its Firm-domain emails to the Firm's retention system. As such, any emails that a Firm employee may have double-deleted or otherwise altered were not maintained in WORM format. Specifically, the Firm failed to ensure that approximately 15% of its Firm-domain emails were retained consistent with SEC and FINRA rule requirements.
Later in 2013 – from December 2013 through February 2014 (the "Second Period") - the Firm experienced another disconnection between its servers and its new email retention vendor. Once again, the emails of any Firm employees who double-deleted or otherwise altered Firm-domain emails were not maintained in WORM format.
United First further failed to evidence supervisory review of electronic communications:
► From February 2012 through March 2014, the Firm failed to maintain evidence of any principal review of its electronic correspondence.
► From June through August 2015, the Firm failed to maintain evidence of any principal review of BIoomberg emails and Bloomberg instant messages- even though the Firm had in place an electronic spreadsheet to evidence such reviews.
The State Street and Acorns cases were reported in FINRA Disciplinary Actions for September 2017. The United Third case was reported in FINRA Disciplinary Actions for October 2017.
For details on any of these cases, go to ... FINRA Disciplinary Actions Online, and enter the respective AWC #.