FINRA Rule 3110: Supervision

Last month, Stephens Inc. was censured by FINRA and fined $900,000 for failing to properly supervise “flash” emails sent by its research department.  According to FINRA Rule 3110, firms must have supervisory procedures established which include procedures for the review of incoming and outgoing written (including electronic) correspondence and internal communications relating to the member’s investment banking or securities business. The issue began when Stephens Inc.’s research analysts sent flash emails to the sales and trading personnel.  Although the research analysts sent the flash emails internally, the lack of supervision created the risk that material non-public information may have been included in the emails which could lead to misuse by the sales and trading personnel.

The risk of misuse was founded on the basis that the flash emails contained publicly available news and insights regarding covered companies that the firm’s customers might be interested in.  The sales and trading personnel used the content in the flash emails for discussions with customers.  This opened the door for the possibility that the sales and trading personnel could have revealed non-public information to customers during these discussions.  From its investigation, FINRA determined that for a period of at least three years, the firm failed to supervision the adequacy and distribution of the flash emails.  During the same time period, FINRA found that Stephens Inc. failed to establish written supervisory procedures concerning trading related to the flash emails.

Although the research analysts sent the flash emails internally, what FINRA discovered next was even more troublesome.  It was discovered that firm personnel forwarded flash emails marked “internal use only” to customers.  In another discovery, FINRA found that information from an unapproved research report was cut and pasted into a separate email and then sent to a customer.  The firm’s personnel were able to violate FINRA Rule 3110 without being detected by the firm because the firm lacked effective monitoring and supervisory systems that would alert it to the violations.   The matter was settled as Stephens Inc. neither admitted nor denied the charges, but consented to entry of FINRA’s findings.

The case of Stephens Inc. is a reminder to all firms that the supervision of broker-dealers must include written supervisory procedures concerning the supervision of correspondences and internal communications relating to the member’s investment banking or securities business.  At a minimum, many firms have procedures in place that require that email reviews are performed on a regular basis to ensure that the firm has insight into what is being sent and can be alerted if there are any red flags.  That may be a good starting point for some firms.  However, it should not be the only procedure implemented. One thing is for certain: violating FINRA Rule 3110 can be costly.

 

 

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