The $7.5 million fine against LPL Financial LLC last week for e-mail violations is noteworthy for its size — it is the largest ever brought by Finra exclusively for e-mail violations — but a review by InvestmentNews shows that it is just the latest example of the regulator's stepped-up enforcement effort in this area.
Furthermore, brokers and their firms will continue to be targets of disciplinary actions for failing to retain and review business-related e-mails, especially where fast growth and increased regulatory requirements overtake stretched compliance resources, legal sources said.
In settling the case against LPL, the Financial Industry Regulatory Authority Inc. said that as the firm "rapidly grew its business, [it] failed to devote sufficient resources to update its e-mail system, which became increasingly complex and unwieldy."
Finra said the firm had numerous systemic failures that prevented access to hundreds of millions of e-mails from 2007 to 2013.
Finra also said the firm made material misstatements during its investigation.
"Fast-growing firms and systems are always a challenge," said Finra enforcement chief Brad Bennett. "Compliance and legal [departments] are being asked to do more with the same resources."
LPL, which has 13,000 registered representatives and financial advisers, had its initial public offering in 2010 after a decade of rapid growth.
The firm neither admitted to nor denied the charges.
"In September 2011, we reported to Finra issues relating to the surveillance and retention of e-mails," LPL said in a statement. "We cooperated fully with Finra throughout its ensuing investigation. We very much regret our lapse of oversight."
The firm has "undertaken a comprehensive redesign of our e-mail systems, and associated compliance policies and procedures," the statement said.
E-mail enforcement actions are rising along with the use of e-mail. A review of Finra e-mail cases by InvestmentNews uncovered nine settlements with broker-dealers year-to-date, not including the LPL case. The total fines amounted to $1.65 million. E-mail violations either were the only ones cited or appeared to make up a major part of these cases.
In all of last year, in comparison, Finra settled 18 such cases for a total of $1.24 million.
Finra often combines various charges in one case, so separating them into unique e-mail cases is somewhat subjective.
A separate study by the law firm Sutherland Asbill & Brennan LLP found a sharp increase in e-mail-related violations last year. The law firm said Finra fines shot up to $6.5 million in 2012, an increase of 81% from the prior year. It counted 63 e-mail cases in 2012, up from 57 cases in 2011. Sutherland included all cases where e-mail violations were part of the case, regardless of how minor.
In one of the noteworthy cases this year, Next Financial Group Inc. this month agreed to pay Finra a $250,000 fine to settle an e-mail case. Securities America Inc. consented to a $100,000 fine in April, and in February, five broker-dealers owned by ING Groep NV settled an e-mail case for $1.2 million.
"There will always be e-mail cases as long as people in the industry are using it," Mr. Bennett said.
Securities and Exchange Commission and Finra rules require broker-dealers to establish written procedures and systems to capture and retain for three years all e-mail communications to the public. Firms either must pre-approve or regularly review at least a sample of e-mails sent by brokers to customers.
TECHNOLOGY STRUGGLE
Firms and brokers often struggle with the technology used for retaining e-mails, and glitches can occur that compliance officials may not be aware of. Also, individual brokers may fail to inform their B-Ds about using outside or personal e-mail.
Finra is especially concerned when failure to retain e-mails might have prejudiced regulators or arbitration claimants, Daniel Nathan, a partner at Morrison & Foerster LLP, wrote in an e-mail.
The LPL settlement requires the firm to put $1.5 million into a fund to pay customer claimants for potential discovery failures. Investors who filed claims as of Jan. 1, 2007, and whose cases were closed by Dec. 17, 2012, will get a standard $3,000. Alternatively, they can ask a fund administrator to approve up to $20,000.
"I'm going for the $20,000, absolutely," said Andrew Stoltmann, founder of the Stoltmann Law Offices PC. He's filed about 50 cases against LPL in the last five years and thinks the amounts offered in the settlement aren't enough.
Mr. Bennett countered that the deal is "more than enough," based on a 2007 settlement with Morgan Stanley that went far beyond a simple e-mail case. The wirehouse agreed to pay $12.5 million to resolve Finra charges that it failed to provide e-mails to arbitration claimants and regulators by claiming the 9/11 terrorist attacks had destroyed all pre-9/11 e-mails. In fact, the firm had retained or restored millions of pre-9/11 e-mails, Finra said at the time.
"We found most [Morgan Stanley claimants] were happy with the standard payout," Mr. Bennett said.
Bruce Kelly and Mark Schoeff Jr. contributed to this story.
28 May, 2013
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Source: http://www.investmentnews.com/article/20130526/REG/305269982
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