Firm Settles FINRA Charges for Supervisory Failures over Outside Business Activities

A firm settled FINRA charges for failing to reasonably supervise outside business activities and for failing to monitor and preserve off-channel business related electronic communications.

According to the AWC, the firm failed to reasonably evaluate six disclosed outside business activities to determine if they should be limited, prohibited, or treated as private securities transactions. FINRA found that the firm ignored "red flags" regarding 11 additional instances of undisclosed outside activities. Further, FINRA determined that the firm failed to record or supervise four approved private securities transactions involving selling compensation.

FINRA found that the firm failed to maintain a system to review and retain electronic communications, specifically regarding representatives using personal email accounts for business purposes. Although the firm’s written procedures prohibited off-channel communications, FINRA noted that supervisors were aware of—and sometimes included on—business emails sent from personal accounts but failed to take action to stop the practice or capture the records.

FINRA found the firm violated SEA Section 17(a) ("Records and Reports"), Exchange Act Rule 17a-4 ("Records to be preserved by certain exchange members, brokers and dealers"), and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision"), 3270 ("Outside Business Activities of Registered Persons"), 3280 ("Private Securities Transactions of an Associated Person"), and 4511 ("General Requirements").

To settle these charges, the firm agreed to a censure, a $125,000 fine, and an undertaking requiring a senior management principal to certify the remediation of supervisory issues within 90 days.