The Financial Industry Regulatory Authority, Inc. (FINRA) posts the disciplinary actions it took to its online database. FINRA also posts a monthly summary of these actions. (Reader’s Digest it is not, but that is not the point.) Setting aside whether one agrees with FINRA’s findings and sanctions, this summary offers insight into FINRA’s regulatory priorities. Below my colleague, Tiffany Rowe of Cadence Partners, PLLC, and I offer a few thoughts on FINRA’s June 2025 edition.
Ryan
June’s release offered the standard panoply of issues, including: violations of Regulation Best Interest, AML failures and various reporting oversights. However, the case that I caught my eye involved a failure to comply with the so-called “Taping Rule” (FINRA Rule 3170). In short, the Taping Rule requires a broker-dealer that has a certain percentage of registered persons who had been associated with a “disciplined firm” within the past three years to record all telephone conversations between its registered persons and any existing or potential customers and review those recordings for compliance with the applicable standards. A broker-dealer that becomes subject to the Taping Rule for the first time may “reduce its staffing levels” (i.e., fire reps) to below the threshold to escape the taping requirement. Most do.
This broker-dealer either could not or did not. Either way, FINRA sanctioned it for not having policies and procedures to adequately address its obligations under the Taping Rule. Specifically, FINRA noted that the firm’s procedures did not provide a time period in which the responsible principals must review the conversations. Nor did these procedures provide any guidance about the steps principals should take upon identifying such concerns. Admittedly, most broker-dealers do not have to comply with the Taping Rule, but this case is still a useful reminder about the art of drafting compliance procedures. Procedures should strike the right balance of providing specific deliverables, while at the same time, not painting the compliance staff into the proverbial corner with its objectives.
And, not for nothing, FINRA also sanctioned the firm for not archiving and reviewing every conversation. This seems like a Sisyphian task, particularly when, as is the case here, the broker-dealer permitted its registered persons to use cellular phones to conduct business.
Tiffany
Regulatory requirements extend beyond those obligations that are observable by investors or regulators. Risk management and supervisory controls are required under FINRA Rule 3110 (Supervision) and the more broadly applicable Rule 2010 (Standards of Commercial Honor and Principles of Trade). A broker-dealer that provided also provided clients with market access, routing, and execution services was censured and fined for failure to establish, document, and maintain risk management controls and supervisory procedures reasonably designed to manage the risks associated with its market access activity. Specifically, the firm failed to maintain reasonable maximum order rate and duplicate order rate limits, exposing client investments to unnecessary risk of loss. The findings also stated that the firm failed to establish and maintain a supervisory system, including WSPs, reasonably designed to detect and investigate potentially manipulative trading. The firm used unreasonably designed parameters to detect and prevent wash sales, layering, and spoofing. The firm’s trade layering and spoofing surveillance only generated an alert if there were seven or more potentially layered open orders. The firm’s failure to allocate resources to reviewing surveillance alerts and review of the alerts by employees that were not sufficiently experienced or trained to review the alerts meant that they were often delayed and incomplete.
The firm was also cited for failure to develop and implement a reasonably designed anti-money laundering (AML) compliance program. The program in place was not tailored to reasonably detect and cause the reporting of suspicious transactions in low-priced securities because the program did not identify red flags and no guidance was given about how to address indicators of suspicious trading. Later when the firm decided to stop trading in low-priced over-the-counter (OTC) securities, it updated its AML procedures to state that it no longer accepted orders in low-priced OTC securities. However, the firm did not reasonably implement those procedures, and it inadvertently continued to accept orders and execute trades in certain low-priced securities and did not reasonably monitor this trading for suspicious activity.
Remediation or amendment of risk management and supervisory procedures won’t get you anywhere if the changes are themselves insufficient or not adequately implemented. These failings resulted in a $300,000 fine in addition to FINRA’s censure for insufficient risk controls and WSPs to address improper or illegal trading.
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Because broker-dealers, registered investment advisers and their representatives want to spend their time serving their clients, not their regulators.
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