No good deed goes unpunished: FINRA punishes firm for failing to supervise use of approved off-channel communications

FINRA recently sanctioned, through a Letter of Acceptance, Waiver and Consent (AWC), a broker-dealer for off-channel communications—not because financial professionals texted or used instant messaging when they weren’t supposed to, but because the firm approved the use of instant messaging but then failed to supervise its use.¹

Before this FINRA settlement, the US Securities and Exchange Commission (SEC) brought more than 100 settled cases against firms for failing to maintain and preserve business-related communications on unapproved platforms such as WhatsApp, iMessage and personal email, with total penalties exceeding $2 billion.² In contrast, this FINRA AWC notably involved an approved platform. Here, FINRA fined the firm $100,000 for “fail[ing] to reasonably supervise the use of an approved electronic instant messaging platform provided by a vendor and fail[ing] to preserve and review certain business-related communications sent and received through the platform.”

Beginning in January 2020, the firm permitted employees to use a vendor-provided electronic instant messaging platform to capture the messages its employees sent and received so that the firm could preserve and review them. According to FINRA, the firm, however, did not: 

1. verify that its employees’ devices were connected and remained connected to the archiving service,
2. verify that employees’ messages were being captured by the archiving service, or
3. describe in its written supervisory procedures (WSPs) how principals at the firm should verify that employees’ devices were connected and remained connected to the archiving service. 

FINRA found that firm employees who were authorized to use the messaging platform either were never connected to the archiving service or were connected for only a portion of the time. As a result, an unknown number of business-related messages were never preserved or reviewed by the firm, and the firm was unable to produce all messages responsive to a FINRA inquiry.

Eventually, the firm started using a new instant messaging platform that enabled the firm to preserve and review employees’ messages without relying on a separate vendor to capture the messages. 

Takeaways—firms should consider the following:

1. Regulators may not be done with off-channel issues. It appears that the SEC and FINRA may still pursue enforcement actions against firms related to off-channel communications. Under the right circumstances, if the regulators find violative conduct, they will bring actions.
2. Even approved platforms may lead to violations. If your firm now permits off-channel communications, consider reviewing this AWC for conduct that FINRA may find violative.
3. “Set it and forget it” may lead to sanctions. Here, the firm put in place an instant messaging platform but, according to FINRA, failed to verify that it worked as intended.
4. Using third-party vendors may not eliminate responsibility. FINRA or the SEC could apply this same analysis to other third-party vendor systems. Firms may be sanctioned if they do not adequately supervise those systems or have adequate WSPs. 
5. Enhancements may lead to reduced sanctions. The AWC notes that the firm put in place a new instant messaging platform. While the AWC does not explicitly state that the firm received “credit” for this change, FINRA’s inclusion of this enhancement as part of its findings likely indicates that FINRA took this action into account when determining the settlement terms. Proactive remediation, even if not formally acknowledged by the regulator, may influence sanctions. 

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 https://www.finra.org/sites/default/files/fda_documents/2022073425101%20Investment%20Placement%20Group%20CRD%2014458%20AWC%20gg.pdf.}

_{2 SEC.gov | Remarks at Securities Enforcement Forum D.C. 2024.}