CSG Law Alert: FINRA’s February 2024 Monthly Disciplinary Actions Report – FINRA Brings Its Own Off-Channel Communications Cases

Earlier this month, the Securities and Exchange Commission (SEC) announced its latest wave of off-channel communications settlements, bringing the total amount of penalties ordered to approximately $1.5 billion. Firms undoubtedly are hoping that these cases are wrapping up, but it appears that the Financial Industry Regulatory Authority (FINRA) may be joining the off-channel communications fray.

FINRA’s February 2024 Monthly Disciplinary Actions Report, which was released last week, features no fewer than three cases that involve the issue of off-channel communications, and lessons can be drawn from each one:

  1. Firms must think beyond text messages when designing their off-channel communications systems and procedures. The December 2023 AWC against WestPark Capital, Inc. focused on off-channel communications—but not text messages. Instead, FINRA found a violation because a representative of the firm used WeChat to communicate with issuers and firm customers, which the firm failed to preserve or review. (The AWC notes that the customers in question were located in China, where WeChat is ubiquitous.)
  2. Firms must know what languages representatives use to communicate with customers—and must have supervisors who speak those languages to review those communications. In the WestPark AWC, FINRA found that the firm’s associated person was using WeChat to communicate with customers and issuers in Mandarin—but none of the firm’s supervisors responsible for reviewing electronic communications read or spoke Mandarin.
  3. Individuals—and not just firms—may face formal disciplinary actions. Although the SEC has focused its enforcement actions on firms, individuals who used (or are using) off-channel communications may be in FINRA’s crosshairs. FINRA brought an action in December against Yann C. Faho, a registered representative who—notwithstanding having signed a certification and annual compliance questionnaires attesting to his knowledge of his firm’s prohibition against off-channel communications—used text messaging on hundreds of occasions to communicate with customers about securities-related business. FINRA suspended Mr. Faho for two months and fined him $5,000. In another December AWC, FINRA brought an action against a registered representative for exercising unauthorized discretion in a customer’s account, and specifically found as an aggravating factor the fact that the representative used “an unapproved communication channel” to discuss the trades in question.

On top of these cases, FINRA brought a formal action against a firm last week (that undoubtedly will be featured in an upcoming edition of FINRA’s monthly disciplinary actions report) that involves a firm’s failure to reasonably supervise its representatives’ off-channel communications. In the Ceros Financial Services, Inc. AWC, FINRA found that the firm did not have a reasonably designed system for supervising business-related communications. While the firm’s written supervisory procedures prohibited representatives from engaging in off-channel communications, the firm was aware that some of its representatives were sending business-related emails between their work email addresses and their personal email addresses. Notwithstanding the fact that the firm was aware of this practice, the firm did not review these emails unless they “happened to meet other firm supervisory email review criteria”—and perhaps more importantly, the firm, despite being aware of this practice, did not take any steps to determine if its representatives were engaged in other off-channel communications (such as emailing customers from their personal email addresses).

It is clear from these AWCs—as well as from FINRA’s 2024 Annual Regulatory Oversight Report —that FINRA is focusing its enforcement efforts on individuals who engage in off-channel communications and on firms that fail to reasonably supervise them. Firms should consider implementing procedures and systems that address their particular representative and customer populations, taking into account, among other things, what types of off-channel communications are most likely to be used by their representatives and customers and what languages they speak. And, as always, firms should be reminded that they cannot put their heads in the sand when they become aware of red flags of potential rule violations. In this context, if firms become aware of red flags that their representatives are engaged in business-related off-channel communications, they must take reasonable steps to follow up on those red flags.  

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