FINRA Regulatory Actions in Q1 2021

The Financial Industry Regulatory Authority’s (FINRA) Enforcement Division has issued its enforcement action summary reports for Q1 2021. The reports listed 40 enforcement actions brought against member firms.

The following tables provide an overview of the sanctions imposed on member firms and the fines levied during each month of Q1 2021:

The largest fines levied in Q1 2021 stemmed from disciplinary actions involving alleged failures in the following areas: compliance with fingerprinting requirements, screening of associated persons’ obligations ($3,875,000), and complying with record retention requirements ($1,508,500).

Below is a summary of several enforcement actions brought against broker-dealers in Q1 2021.

Monitoring of electronic correspondence and record retention requirements

FINRA Rule 3110(b)(4) requires broker-dealers to review their firms’ incoming, outgoing, and internal correspondence relating to their securities business, whether in written or electronic form. In a Letter of Acceptance, Waiver, and Consent (AWC) issued in January 2021, FINRA censured and fined a member firm $150,000 for allegedly failing to capture approximately six million emails from 109 employee email accounts for supervisory review due to a coding error.

Notably, in its five-page AWC, FINRA specifically stated that the firm:

1. had no process in place to ensure that emails were being journaled appropriately,
2. did not conduct an initial test to make sure the process worked and that each new employee’s emails were in fact journaled to the review platform, and
3. did not monitor the volume of email captured by its review platform for irregularities or conduct any reconciliation of the email addresses to be monitored with the emails that were captured.

While this AWC focused primarily on monitoring electronic correspondence, FINRA also censured and fined 10 member firms a total of $12,103,000 for alleged violations related to Section 17(a) of the Exchange Act and Rules 17a-3 and 4 thereunder. The following is a sample of such alleged violative conduct:

1. Exclusion of a member firm’s certain senior management from the electronic communication review process
2. Failure to retain electronic records in the required Write-Once-Read-Many format
3. Failure to notify FINRA 90 days prior to employing electronic storage media

It is worth noting that, given the increase in member firms’ reliance on third-party vendors to archive and maintain electronic records, broker-dealers should establish policies and procedures to monitor and audit such outsourced activities. Specifically, Rule 17a-4(f) under the Exchange Act requires member firms to have in place an audit system for tracking the inputting of records into electronic storage.

Reminder of anti-money laundering obligations

FINRA issued three AWCs against member firms related to alleged violations of various anti-money laundering (AML) obligations. Specifically, FINRA fined and censured two member firms for alleged failures to establish and implement an AML program reasonably designed to detect and cause the reporting of potentially suspicious activity relating to low-priced securities and activity arising from wire transfers to customer accounts. In addition, FINRA fined a member firm for allegedly failing to conduct the annual independent testing of its AML program.

FINRA had recently issued Regulatory Notice 21-03 urging member firms to “review their policies and procedures relating to red flags of potential securities fraud involving low-priced securities.” In this notice, FINRA offers a non-exhaustive list of 22 issuer, third-party, or customer activities that may be identified as red flags. It also suggests 18 supervisory controls aimed at mitigating risks associated with fraud for firms to consider incorporating in their AML programs.

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