A registered broker-dealer recently executed a Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA regarding alleged violations of record retention rules applicable to emails. In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, which are summarized in this article.
Background. According to the AWC, during the period October 2008 to December 2009, the broker-dealer failed to retain millions of emails. The firm had previously upgraded its email system from a backup tape-based system to a journaling system in which employee emails were sent to one of 58 servers (with every employee being assigned to one of the servers). The email servers sent copies of all sent and received emails to a hub transport server, which then routed the emails to the journaling server. The journaled emails were then electronically transferred by a third-party vendor from the journaling server into the email archive. Due to a technical fault, three of the 58 servers did not send copies through to the archives during the relevant period.
FINRA found that the broker-dealer failed to perform sufficient quality assurance tests during its upgrading process. Further, the firm did not apply its automated quality assurance process to each of its 58 servers, which would have detected the archiving problems. Lastly, the monitoring software that the firm utilized was not sufficiently designed to flag reasonably foreseeable errors.
According to FINRA, the broker-dealer’s email retention failures potentially impacted at least five FINRA investigations and may have impacted the firm’s ability to produce emails fully responsive to requests in other matters.
The AWC notes that the broker-dealer has a history of failing to preserve records as required by NASD and the NYSE rules. In 2002, while doing business under another name, the broker-dealer, along with four other firms, was disciplined for failing to preserve electronic communications. The firm was censured and fined approximately $1.6 million, and agreed to an undertaking to certify that it had established systems and procedures reasonably designed to comply with applicable laws and rules concerning the preservation of its emails. The broker-dealer certified that it had complied with the undertaking in 2003.
Violations. FINRA charged the broker-dealer with failure to retain all required emails in violation of NASD Rule 3110(a), Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(b)(4) thereunder. FINRA also charged the broker-dealer with failure to reasonably supervise in violation of NASD Rule 3010, because the broker-dealer’s supervisory systems and procedures relating to the retention of emails failed to timely detect the retention failures.
Sanctions. The AWC notes that the broker-dealer detected the system failures and self-reported the violations to FINRA. Although the AWC states that the penalty reflects credit for self-reporting and providing additional information obtained as a result of the firm’s own internal investigation, FINRA imposed, and the broker-dealer agreed to, a censure and $750,000 fine.