FINRA Fines Firm for Supervisory Failures over Form CRS Disclosures and Outside Business Activities
A firm settled FINRA charges for supervisory failings regarding Customer Relationship Summary forms ("Form CRS"), outside business activities, email oversight, and customer documentation.
According to the AWC, the firm failed to include required disclosures in its Form CRS, including its disciplinary history and mandatory "conversation starters" related to fees, costs, and conflicts of interest. FINRA stated that the firm did not correct the omissions for approximately ten months, until it filed an amended Form CRS.
FINRA found that the firm failed to maintain adequate supervisory procedures governing email archiving and review. FINRA determined that the firm’s written supervisory procedures did not identify who was responsible for oversight, did not describe how reviews should be performed or documented, nor establish expectations for frequency and scope. FINRA noted that, for roughly seven months, the firm did not preserve or review any business-related emails due to a lapse in its third-party archiving system, resulting in the loss of more than 1,000 messages. FINRA also stated that the firm allowed representatives to use personal email accounts for firm business without ensuring those communications were captured or reviewed.
FINRA found that the firm failed to reasonably supervise outside business activities. FINRA determined that the firm’s procedures did not require documentation of its review of key factors when evaluating such activities, and even after revisions, continued to omit necessary documentation requirements. FINRA also found that the firm failed to record its evaluation of certain representatives' outside business activities after receiving written notice.
FINRA also determined that the firm failed to establish supervisory policies to ensure the proper collection of customer investment profile information. FINRA stated that the firm’s account forms did not gather essential data such as risk tolerance, liquidity needs, or investment time horizons. FINRA noted that, for some customers who purchased direct business mutual funds, the firm relied solely on third-party forms that lacked key investment details. FINRA further found that the firm failed to implement supplementary methods to capture or document profile information obtained through customer discussions and concluded that it did not maintain complete or accurate records of certain retail customer investment profiles.
FINRA concluded that the firm violated SEA Sections 17(a) ("Records and Reports"); and SEA Rules 15l-1 ("Regulation Best Interest"), 17a-3 ("Records to be made by certain exchange members, brokers and dealers"), 17a-4 ("Records to be preserved by certain exchange members, brokers and dealers"), 17a-14 ("Form CRS, for preparation, filing and delivery of Form CRS"); as well as FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision"), 3270 ("Outside Business Activities of Registered Persons"), and 4511 ("General Requirements").
To settle the matter, the firm agreed to (i) a censure, (ii) a $65,000 fine, and (iii) an undertaking to certify within 90 days that it had remediated the cited deficiencies and implemented a supervisory system reasonably designed to ensure compliance with applicable Exchange Act and FINRA rules.