Home -> Law Blog Directory -> Corporate & Securities Law Blogs -> OverRegd - Securities Regulation and Litigation Blog

Corporate & Securities Law

: OverRegd - Securities Regulation and Litigation Blog

E-mail Supervision Failures Lead To $1.2 Million FINRA Fine

The bar for supervising electronic communications has been raised.  The age of e-mail spot checks and reliance on brokers to forward to supervisors hard copies of their correspondence for review is gone.  According to a press release, FINRA has fined MetLife Securities and three affiliates $1.2 million for failing to have in place an adequate supervisory system to monitor broker e-mail communications with the public.  The fine also resolves "charges of failing to establish adequate supervisory procedures relating to broker participation in outside business activities and private securities transactions."

A sign of things to come?  Firms should pay close attention to this decision as the implications may be far reaching.  While MetLife and its affiliates entered into a settlement agreement consenting to FINRA's findings without admitting or denying any wrongdoing, FINRA made several key findings that equate to a supervisory "floor" for monitoring broker e-mail communications with the public.

Timeliness is everything.  According to the press release, a key criticism FINRA had of the firms' supervisory systems is that no mechanism existed that would allow supervisors to "directly monitor e-mail communications of brokers."  Instead, brokers would forward their e-mails to supervisors and, in the process, could delete e-mail that might otherwise have been "red flags."  In this case, more than 100 e-mails went undetected which later showed that one of MetLife Securities' brokers "stole nearly $6 million from his customers in connection with his participation in numerous private securities transactions to raise capital for real estate development companies with which he had a relationship."  FINRA also found that the "firm's inability to ensure compliance with the e-mail forwarding requirement meant they could not adequately enforce their own supervisory procedures relating to outside business activities and private securities transactions."

Social networking and other forms of electronic communications - recipe for a supervisory nightmare?  Common sense suggests firms should treat all forms of electronic communication like e-mail communications given their similarities until such time as FINRA or the SEC state otherwise.  But policing these communications may prove to be more difficult in practice if the firm is either unaware or ill-equipped to monitor outside e-mail accounts and websites brokers are using to communicate with the public.  While it is unclear at this time how or if FINRA and the SEC intend to tackle the relatively recent explosion of social networking and other electronic media, it's probably a safe bet that we will see more for fines for failure to supervise electronic communications in the coming years.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on December 01, 2009 (boomark / email).