FINRA Email Settlement Raises More Questions Than Answers

January 8, 2015

To clean it up a bit: stuff happens.  Everyday we make mistakes, and many, perhaps most of them, are "inadvertent." A lot of crap that goes wrong isn't the result of some nefarious plan for world domination engineered by some brilliant but corrupt bad guy. All too often, when things go off the tracks and into a ditch, it's because some idiot just had a brain fart and screwed up. Unfortunately, when we try to apportion blame and seek redress for something that was unintended and accidental, it often devolves into a morality play of sorts. On Wall Street, regulation frequently comes off as little more than a sanctimonious, hypocritical speed-trap because far too many enforcement cases appear to be of the gotcha variety. Which is not -- and let me repeat that -- which is NOT to suggest, not even remotely, that there aren't lots of bad guys in the biz who intentionally do lots of wrong things and hurt lots of innocent folks. The challenge here is for balance. I applaud all the fervor that goes into investigating, charging, and bringing to justice the crooks. On the other hand, I also caution against excessive regulation because it cultivates a subculture where the dangerous lesson learned is that it's best to cover-up mistakes. Consider Bill Singer's concerns with this recent FINRA settlement.

Case In Point

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Forethought Distributors, LLC, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Forethought Distributors, LLC, Respondent (AWC  2013038584601, December 26, 2014).

Formerly known as Planco Financial Services, Inc., LLC and Hartford Life Distributors, LLC, Forethought has been registered with FINRA since 1980, and acts as a wholesaler and principal underwriter of variable annuity products through 10 registered branch offices and 73 non-registered office locations. The AWC asserts that Forethought had no prior relevant formal disciplinary history.

Outside Vendor

The AWC alleges that on January 1, 2013, Forethought began using a new outside vendor for its email retention system. The AWC asserts that in February 2013, Forethought discovered that 11 email accounts were not properly set up to journal automatically to the firm's email retention system. This failure is characterized in the AWC as the "result of inadvertent gaps in internal processes."

In September 2013, after receiving a request from FINRA for email concerning a registered representative, Forethought purportedly discovered that the email journaling issue had recurred with respect to additional email accounts (apparently raising the overall number of affected email accounts to 29). In October 2013, the firm reported the issue to FINRA.

Sending A Message

FINRA alleged that by failing to maintain and preserve business-related electronic communications, Forethought violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(b)(4) thereunder, and FINRA Rules 4511 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Forethought a Censure and $40,000 fine.

Bill Singer's Comment

Let's do a brief recap of the facts presented in this AWC:

  • The AWC asserts that Forethought hired an outside vendor to maintain an email retention system. There is no allegation by FINRA that the vendor was incompetent or that Forethought knew or should have known that such was the case when it first retained the outside firm. 
  • About a month or so after retaining the vendor, Forethought discovered on its own in February 2013 that 11 email accounts were not properly set up as a result of "inadvertent gaps in internal processes."  
  • Seven months after the firm's February 2013 discovery about the journaling errors, Forethought got a September 2013 request from FINRA that required an email production. While obtaining responsive materials to FINRA's request, Forethought apparently discovered that a further 18 email accounts had not been properly set up for journaling by the outside vendor -- bringing the total number of such improperly maintained accounts to 29. 

Clearly, something went amiss because 29 email accounts were not properly accounted for. Exactly what went wrong is unclear because the AWC fails to offer that tidbit. Frankly, the failure here may well have been the byproduct of the normal start-up trial-and-error inherent in all new relationships involving outside service providers. It could also have been a result of incompatibility between or among various online platforms -- or it could be as simple an explanation that Forethought didn't pay enough attention to signs that there were gaps in its email oversight. Unfortunately, the AWC leaves us guessing on those points.

I am not arguing that the firm's conduct was not worthy of some sanction. That may well be the case; however, that is not the case made out in this AWC.  If FINRA meant to point a finger at some specific failure(s) in its member's oversight of the outside vendor, then such conduct should have been specifically set forth in the AWC.  I accept that there were 29 email accounts not properly archived; what I don't understand is exactly what the respondent firm did wrong other than having hired an outside service provider. If Forethought did something "wrong," then FINRA has an obligation, minimal as it is, to set forth the dimension of the alleged violation. 

In settling the allegations, FINRA charged Forethought with having violated:

FINRA Rule 2010. Standards of Commercial Honor and Principles of Trade

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.

I mean, seriously?  A FINRA member firm hires an outside provider, discovers some lapses within a month of entering into the relationship, about nine months thereafter discovers some further problems, and that equates with a failure to observe high standards of commercial honor and equitable principles of trade

If you think that I'm overstating the case, please feel free to independently read the full-text AWC: READ

Read the Blog "Email" Archive