On April 12, 2019, the Financial Industry Regulatory Authority (“FINRA”) issued a settlement with a Salt Lake City-based broker-dealer, Wilson-Davis & Company (“Wilson-Davis”), due to poorly designed and implemented email review procedures. The misconduct was observed January-August 2013 when Wilson-Davis “failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to review email correspondence for indications of potential violations of federal securities laws or FINRA rules,” according to the Letter of Acceptance, Waiver, and Consent released by FINRA.
The email review process was deemed problematic because: (1) the sample size of 100 emails per week was insufficient; and (2) the key word search terms were considered, in some cases, too broad or general and not indicative of actual security risks.
The haphazardly executed email review, and subsequent investigation, led Wilson-Davis and FINRA to reach a settlement of a $32,500 fine.
FINRA published a guidance notice in 2007 regarding supervision of electronic communications, which was referenced in this enforcement action. The guidance states that electronic communication of registered representatives should be reviewed using a risk-based approach and conducted by someone with adequate knowledge, experience, and training.
While a risk-based approach is permitted, this enforcement makes it clear that there are certain baseline expectations and that action will be taken against advisers regulated by FINRA who do not fully consider the size, risks, and business practices of their firm.
Suggestions for conducting email review include creating a list of relevant flagged terms, making the list of flagged terms confidential, and utilizing systems able to analyze email attachments.
Firm email review procedures are not considered a priority in SEC examinations because the practice does not pose the same risk as other forms of communication.
WHAT DOES THIS MEAN FOR ME?
If your firm or individuals at your firm are regulated by FINRA, it is important to maintain and follow policies and procedures related to this type of email review. Ensure that review is sufficient and overseen by a supervisor or principal of the firm, even where the review is delegated. Our team is always working to stay updated on evolving regulatory expectations. Contact Fairview with questions regarding the email review process and how it affects your firm.
Sources: https://files.brokercheck.finra.org/firm/firm_3777.pdf, page 17