Accurate Record Keeping & Supervision Vital as FINRA Temporarily Lifts Rules, SEC Suspends In-Person Exams During Pandemic

Attorney Advising Disclaimer

With COVID-19's new social distancing normal prompting the SEC to suspend in-person exams and FINRA to provide temporary relief to firms from adherence to certain rules and requirements, the securities industry may start to look like the wild west with its seemingly decreased regulatory power.

With regulators taking a coronavirus-prompted temporary step back, firms must stress the importance of maintaining accurate books and records, including electronic communications (e.g., e-mails). Similarly, supervision and adherence to policies and procedures will prove critical during the uncertainty of stay-at-home orders, lockdowns, and market turbulence.

With many brokerage firms also shifting to remote operations in addition to FINRA's decision to temporarily relieve firms from certain rules, coronavirus may unfortunately provide a pathway for unscrupulous brokers to engage in misconduct from felonious fraud and selling away to lesser violations of suitability, with a greater chance of evading timely detection.

FINRA's requirement to establish and maintain an accurate books and records system may not sound like the most exciting rule, but it is an absolutely vital investor protection which the regulator, through previous multimillion-dollar fines, takes seriously.

For instance, FINRA in 2016 fined 12 firms a total of $14.4 million for significant deficiencies related to preservation of electronic brokerage and customer records. Citing severe cybersecurity failures, FINRA fined Wells Fargo Securities $4 million, RBC Capital Markets $3.5 million, RBS Securities $2 million, Wells Fargo Advisors $1.5 million, SunTrust Robinson Humphrey $1.5 million, LPL Financial $750,000, Georgeson Securities Corporation $650,000, and PNC Capital Markets $500,000.

LPL, specifically, consented in 2015 to a $10 million penalty and order to pay customers $1.6 million in restitution, all because of "multiple supervisory failings and other deficiencies, including books and records issues." FINRA similarly fined Scottrade $2.6 million in 2015 for failing to retain a "large number" of securities-related records and e-mails, and for an inadequate supervisory system that contributed to the record-retention failures.

Simply stated, record keeping failures make it easier for rogue reps to delete e-mails, illicitly sell away from their firms, or even fabricate documents, all while making it that much more difficult for the firm to supervise or detect this misconduct.

With brokers working away from the physical office, supervisors must take more active roles in reviewing potential red flag or unsuitable transactions and other instances of suspicious sales lest a broker seek to take advantage of the unprecedented coronavirus situation.

For example, the SEC barred criminally-charged broker Dennis Farrah in 2020, adding to FINRA's suspension of Mark Gregory Raezer for misrepresenting Madyson Capital real estate investment trust (REIT) products and selling the offerings away from their firm, Taylor Capital Management.

At least one complaint in Farrah's file charged his employer, Taylor Capital Management, with failing to supervise its broker.

It doesn't end with bad actors, either. If communication falters due to social distance or a suspicious transaction slips through the cracks due to a supervisory breakdown, even an investment adviser with the best of intentions may improperly select products not in the client's best interest or congruent with stated risk tolerance levels or other investment objectives; a preventable mistake, without adequate supervision, can turn into a significant problem.

If you have invested with a broker or financial adviser whose unsuitable recommendations or misconduct away from their firm, or with a firm whose failure to supervise its representative or failure to retain accurate books and records, including e-mails, has proven harmful to your investments or interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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