CSG Law Alert: FINRA’s January 2024 Monthly Disciplinary Actions Report
The Financial Industry Regulatory Authority (FINRA) recently released its January 2024 Monthly Disciplinary Actions Report. Below, we offer some themes and lessons from the cases featured in the report, with the hope that they will help legal and compliance personnel be on the lookout for issues that are concerning regulators.
1. Cautionary Action Letters (CALs) and exam findings can come back to haunt you. If your firm has ever received a CAL, you may recall that it contains language to the effect that while it is not a reportable disciplinary event, it can be considered in a subsequent disciplinary matter. In the November 2023 AWC against Bolton Global Capital, FINRA hearkens back to an earlier warning given to the firm – which was not a prior formal disciplinary action (note the AWC language, “The firm was on notice from a prior FINRA examination that, to comply with the Safeguards Rule, Bolton needed stronger cybersecurity practices …”). Another November 2023 AWC contains similar language, “[d]espite receiving a warning from FINRA during March 2018, [the firm] had no policy or process …” surrounding the issues that are the subject of the AWC. So, if you thought a CAL or even routine firm exam findings put an issue to bed, think again.
2. Respond appropriately to FINRA findings – and follow through on any representations you make to FINRA. The Bolton Global Capital AWC notes that the firm did take some follow-up steps after FINRA made its earlier exam findings, but apparently the firm did not go far enough. According to the AWC, the prior exam findings informed the firm that it needed to limit system access to third-party service providers. While the firm evidently tightened up its cybersecurity practices with respect to its own employees, it apparently failed to do so, at least in some regards, with its third-party service providers.
These themes are repeated in the November 2023 AWC against Sun’s Brothers Securities Inc. There, FINRA set forth three AML program-related findings from Sun’s Brothers’ 2019 cycle examination – findings that did not result in a formal disciplinary action against the firm – and then found that the firm failed to follow through on its representations to FINRA that it would update its AML procedures in response to the prior exam’s findings.
It is clear from these two AWCs that FINRA, in conducting its exams, is checking to see if firms have remedied prior deficiencies and followed through on prior representations about corrective measures. The Sun’s Brothers Securities matter, in particular, can be characterized as a “low-level” formal disciplinary action (a $15,000 fine was imposed) – meaning that even relatively small violations can turn into formal disciplinary actions if they are repeat offenses.
Firms should consider implementing processes to make sure that prior CALs and exam findings are corrected promptly (ideally with documentation) and that the firm’s representations to FINRA are carried out (and if they can’t be, consider whether an affirmative reach-out to FINRA might be appropriate).