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As the FINRA WORM Turns
May 25, 2018
BrokeAndBroker.com Blog publisher Bill Singer, Esq. lets it fly today with his analysis of a FINRA regulatory settlement involving a four-rep member firm. It's not that the firm didn't screw up. It appears that it did. Some nonsense involving how it stored emails going back some six years. Bill gives FINRA that much. There was misconduct. There were violations. He's not arguing those points. On the other hand, what's accomplished with the meaningless gesture of a Censure and the impotent imposition of a $5,000 fine? Would you like fries with that settlement? Would you like to super-size your beverage? Is that to go? Will that be cash or charge? Have a nice day!
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Integrated Trading and Investments, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Integrated Trading and Investments, Inc., Respondent (AWC 2016047872901, May 21, 2018).
Under the heading "Background," the AWC states as follows:
Integrated became a FINRA member in December 1999. The firm is headquartered in Huntington Beach, California, employs four registered representatives, conducts a general securities business, and occasionally facilitates direct investments in variable annuities, mutual funds, and alternative investments. Integrated has no relevant disciplinary history.
The WORM Hole
Section 17(a) of the Exchange Act, Exchange Act Rule 17a-4, and FINRA Rule 4511 permitted Integrated to retain certain business-related electronic communications using electronic storage media ("ESM") provided that, among other requirements, the firm's ESM preserves such records in a non-rewriteable, non-erasable "write-once-read-many" or "WORM" format,
The AWC asserts that during the relevant period between January 2012 and July 2016, Integrated allowed its registered representatives to use personal email accounts to conduct their securities business and the firm preserved business-related emails using ESM. The AWC alleges that:
[U]ntil July 2013, the firm's representatives were required to forward their business-related emails from their personal email accounts to the personal email address of the firm's President/Chief Compliance Officer ("CCO") for storage. These emails along with any other business-related emails sent from or received by the CCO's personal email address were not stored in WORM format. Beginning in July 2013, the firm's representatives were required to forward business-related emails conducted in their personal email accounts to firm email addresses for storage. The firm's representatives did not always follow this requirement. As a result, certain of their business-related emails were not maintained and preserved in WORM format.
Honor System
The AWC further asserts that during the roughly 4 1/2 year relevant period that Integrated did not use an automated system for the review and preservation of all business-related emails. In part, the AWC asserts that:
Integrated relied on an "honor system" for registered representatives to manually forward business-related emails, including those with customers, from their personal email accounts to the firm's CCO (until July 2013) and to business email addresses assigned by the firm (beginning in July 2013). As a result, the firm's compliance with its review and preservation obligations depended on its representatives' compliance with this requirement. The firm, however, had no supervisory system and procedures to ensure that its representatives complied with this requirement.
As a result of the firm's honor system, business emails sent/received by registered representatives using their personal email accounts were allegedly not reviewed if such emails were not forwarded to the firm by the rep. The AWC asserts by way of example that:
business-related emails using personal email accounts were not forwarded by three registered representatives between April 2012 and July 2013 and by another representative between August 2013 and January 2014. The firm was unable to evidence any review of these emails.
CCO's Emails
Further, the AWC asserts that between January 2012 and July 2013, Integrated did not require that emails sent/received by its CCO be reviewed by another principal or otherwise arrange for a reasonable review of the CCO's emails.
FINRA Sanctions
Accordingly, FINRA deemed that in violation of Section 17(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act, Rule 17a-4(f) thereunder, NASD Rule 3010, and FINRA Rules 3110, 4511, and 2010 Integrated had failed to:
- maintain and preserve certain business-related emails in a non-erasable, nonrewritable format, also known as "WORM" format
- establish, maintain, and enforce a reasonably designed supervisory system relating to the review, maintenance and preservation of business-related emails; and
- review and supervise certain business-related emails.
In accordance with the terms of the AWC, FINRA imposed upon Integrated a Censure and a $5,000 fine. The AWC states that FINRA imposed a lower fine after considering, among other things, the firm's revenues and financial resources.
Bill Singer's Comment
Let me make it very clear that I view this FINRA AWC settlement as bull shit. Blunt enough for you?
Lost in all this WORM and email nonsense involving Integrated is that we're investigating and sanctioning what the AWC describes as a firm that "employs four registered representatives." We got a dinky, little brokerage firm with four reps, who are likely sitting around a card table on folding chairs and the written supervisory procedures are on the floor propping open the door. Maybe the CCO is also the CEO and also the FINOP and also the Fire Warden. Maybe the Branch Manager is also the guy who orders the office supplies and runs the weekly football pool? Maybe two of the reps are still using Hotmail email accounts? WORM format? You think they know what that means? They probably paid a compliance consultant -- probably a former FINRA employee -- to set up all that compliance crap. ESM? My guess is that they think you call ESM if someone is having a heart attack.
What the hell is accomplished by imposing a Censure on Integrated? What is a Censure and who even cares about it? Why not do away with Censures and require a member firm to empty the entire contents of a can of Febreze in its offices. And the difference between a Censure and an emptied can of Febreze is what?
Then there's that $5,000 fine. How does the transfer of $5,000 from a small firm to the bloated regulator that is FINRA protect the investing public and improve the industry? Lost in all of FINRA's finger pointing at Integrated is the self-regulator's failure to timely discover Integrated's violations in 2012, 2013, 2014, 2015, and 2016 -- and there's not even an explanation as to why this is all getting settled in 2018. Maybe the Securities and Exchange Commission should impose a Censure and $5,000 fine on FINRA for being asleep for something like two to six years and not timely alerting one of its smallest member firms that it was improperly archiving emails? I'm gonna be the bigger person here and ask the SEC not to Censure FINRA but to permit the regulator to purchase a case of Febreze.