As e-communication channels proliferate, risk of Finra fines spikes

Smarsh survey finds 88% of firms issue mobile devices to employees who use them to IM, text and tweet

May 19, 2014 @ 2:59 pm

By Joyce Hanson

Advisory firms may be inadvertently creating an unceasing flow of revenue into Finra's coffers.

E-messaging channels such as instant messaging, text/SMS messaging, Twitter, Facebook and LinkedIn have grown rapidly, but the proliferation of e-messaging and devices may backfire on firms if they find themselves in Finra's crosshairs.

The No. 1 source of fines levied by the Financial Industry Regulatory Authority Inc. in 2013 was e-messaging, and the total cost of fines rose by 132%, Sutherland Asbill & Brennan reported in February.

Some 88% of firms now issue mobile devices to employees and the number of electronic messaging channels that firms allow employees to use for business purposes has nearly doubled in the past three years, according to a survey from social-media archiving and compliance firm Smarsh Inc. that was released Monday at Finra's annual conference in Washington, D.C.

Stephen Marsh, chief executive and founder of Smarsh, said the amount of electronic communications fines levied by Finra has been increasing since 2009. The total of such fines stood at $1.9 million in 2009, rose to $4 million in 2010, $5.3 million in 2011, $6.5 million in 2012 and $15.1 million last year.

The $15.1 million in fines last year came from 66 cases involving alleged electronic communication violations, Sutherland found by looking at cases reported and corresponding fines in Finra's monthly disciplinary and other actions reports.

Fines are rising because even before Finra audits a firm, it will request e-communications data, Mr. Smarsh said. If the firm can’t produce the data, Finra will slap it with a fine, he said.

“Whether for a routine audit or whether Finra is investigating a for-cause issue, no matter what, if they’re coming in, you have to produce communications on request,” he said.

Asked if the survey revealed any significant e-messaging gaps, Mr. Smarsh pointed to mobile text messaging.

“It’s become the elephant in the room,” he said. “Everyone knows mobile text messaging is being used, but most companies don’t have a way to archive those messages.”

The growing complexity in electronic messaging supervision is a challenge for advisory firms, said Brian Rubin, the head of Sutherland's Securities Litigation and Enforcement Group. Because there has been an explosion in messaging and e-communications, there may be more problems for firms to address, he said.

“Firms are probably responding to the demands of their advisers and clients by allowing advisers to use other social media sources, but firms need to adequately supervise and retain those communications. A lot of the enforcement actions were caused because firms inadvertently didn't retain or supervise the communications because of technology glitches,” Mr. Rubin said at the Finra conference.

The highest fine ordered by Finra's enforcement unit in 2013 was a $7.5 million against LPL Financial that was related to the firm's failure to review and retain hundreds of millions of e-mails, Sutherland reported.

The Smarsh survey also found that registered investment advisers lag behind Finra-member broker-dealers in retention and supervision of e-messaging, with 53% of RIAs saying they're concerned about their ability to produce data upon request, versus 29% of broker-dealers.

A total of 283 individuals in financial services with compliance supervision responsibilities participated in the Smarsh survey, held in January and February of this year.

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