The last quarter of 2022 saw FINRA continue its focus on communications compliance. Four brokers and a compliance officer faced disciplinary action for a range of breaches of their approach to supervision and an inability to retrieve phone records.
For the key lessons to be learnt together with more detail of the enforcement please click here.
At a high level the disciplinary actions resulted in censures, a 40 day prohibition, fines totalling over $2m, restitution of nearly $50,000 and wide ranging remedial actions.
A broker was found to have failed to establish, maintain, and enforce a reasonable supervisory system, including WSPs, to review electronic communications that its registered representatives sent and received. As a result, in December 2022 the firm was censured and fined $45,000. The firm was also mandated to undertake remedial action, certified by an executive, which required a retrospective review of emails sent and received during a five year period to detect any FINRA rule violations.
A broker was found to, from May 2017 to March 2021, have failed to timely or completely produce certain phone records in response to requests in ten separate FINRA investigations. In certain responses, the firm also inaccurately represented to FINRA that phone records older than 18 months were not available, even though that was not the case. The firm did not promptly alert FINRA once it learned of its production failures. As a result, in December 2022, the firm was censured, fined $1.1m and required to undertake remedial action.
A compliance officer was found to have failed to reasonably supervise the sales practices of two registered representatives. The first breach was a failure to reasonably supervise recommendations made by Representative A. The second breach was a failure to reasonably investigate red flags that Representative B was using an external email address to transmit securities-related documents to the firm’s customers, or ensure those communications were retained. As a result, in December 2022, the compliance officer was subject to a 40 business-day suspension from associating with any FINRA member in all principal capacities and fined $5,000.
Two brokers were found to have failed to reasonably supervise two registered representatives who engaged in a scheme to overcharge commissions to seven institutional customers,
The firm prohibited representatives from making misleading statements in communications with the public and surveilled communications to detect potentially misleading statements. The firm's communications surveillance team reviewed the communications flagged by its surveillance system but failed to examine the attached confirmations where representatives were misrepresenting commissions and misstating the share price.
As a result of a number of findings, in October 2022, the brokers were censured, fined a combined total of $1.1m, required to make restitution of $48,574.79 plus interest and required to certify that they had completed a review of their policies, procedures, and systems regarding the monitoring of electronic communications.
How Theta Lake can Help
Theta Lake’s multi-award winning product suite provides patented compliance and security for modern communications utilizing over 100 frictionless partner integrations that include RingCentral, Webex by Cisco, Microsoft Teams, Slack, Zoom, Movius and more. Here’s some of the ways Theta Lake can help you align with the better practices expected in the multiple FINRA enforcement actions:
- Theta Lake captures and compliantly archives communications including videos, voice, email (including attachments), chat, screen share and file transfer from mobile messaging platforms to SMS and WhatsApp to enable compliance with the relevant FINRA and other requirements. It also acts as an archive connector, enabling existing archives and data storage to be utilized without disruption.
- AI-enabled automated detection of potential misconduct. Identified risks are surfaced in an AI-assisted review workflow providing an efficient and effective review process for compliance teams. Theta Lake has more than 85 risk detections which are pre-trained and ready for customer use with customers able to provide feedback and training on the classifiers.
- There’s complete flexibility to set retention periods to suit your needs. Theta Lake supports rapid identification, and consistent legal hold, of relevant communications, content and images across platforms to support investigations, regulatory review, audits or complaints.
- The ability to ensure that all aspects of messaging can be preserved, and a full audit trail provided to supervisors, regulators or prosecutors. For example, chat messages can be viewed in their native format over the entire history of the conversation with full context retained together with in-meeting communications and images, GIFs, emojis or reactions that change meaning and context.
- The ability to monitor communications, as well as enforce information barriers, across multiple platforms - supporting heightened supervision.
- Theta Lake’s suite is SOC2, Type II audited and maps controls to ISO 27001 so confidential, privileged or sensitive data can be automatically redacted to meet data privacy and other legal obligations.
- Rich eDiscovery and search capabilities with capabilities across hundreds of search filters and metadata, as well as free-form text search across what is spoken, shown on screen, shared, or written.
IF YOU’D LIKE TO SEE HOW THETA LAKE CAN HELP, REQUEST A DEMO TODAY FROM OUR FRIENDLY TEAM.