If there is a hallmark of the Financial Industry Regulatory Authority's ("FINRA's") approach to Wall Street regulation, it is likely found in the self-regulatory organization's FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade:
It's a lovely sentiment, no? Wall Street's industry cop requires its members to observe high standards of commercial honor. Of course, in recent years -- okay, in recent decades -- that concept of "commercial honor" seems a somewhat elusive one for many of FINRA's largest member firms. I mean, you know, it's sort of been in the news. Maybe you saw some of the cases involving municipal bonds, mortgages, high frequency trading, LIBOR, Madoff, Stanford, Ponzi schemes, elder fraud, price fixing, bid rigging, and, well, go look it up. As such, I read with great interest a recent FINRA regulatory settlement in which the self regulator apparently demands that its member observe high standards of commercial honor but it doesn't much care for the implementation of the "honor system" when it comes to compliance and supervision.
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
For the purpose of proposing a settlement of rule violations alleged by FINRA, without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, PFA Security Asset Management, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of PFA Security Asset Management, Inc., Respondent (AWC # 2014038912201, June 22, 2015).
Since 2000, PFA has been a FINRA member firm retailing mutual funds and variable annuities through six registered representatives. The AWC asserts that the firm had no prior disciplinary history with the Securities and Exchange Commission, any state securities regulator, or any self-regulatory organization.
The AWC alleges that from January 27, 2010, through June 25, 2014, PFA's written supervisory procedures did not specify how electronic communications should be retained. According to FINRA's allegations, PFA relied upon an "honor system" pursuant to which registered representatives were to print business-related emails sent from and sent to clients. The printed emails were reviewed at PFA's Operations Committee meetings, and then scanned and electronically saved as PDF files.
According to the AWC, there were three main areas of shortcomings in PFA's email oversight:
Alas, other than advising its representatives of their responsibilities to print business-related emails and attachments, PFA apparently did nothing further to ensure that its honor system was being honored and that it was working successfully. The AWC alleges that PFA had no means to test or ensure that its representatives were, in fact, printing their emails and attachments. And even more damning, the AWC asserts that the firm did not review any registered representatives' firm-provided or personal email accounts to ensure compliance.
PFA apparently submitted a Corrective Action Statement via letter dated June 10, 2015, in which the firm stated:
In response to the violations regarding e-mail retention and review, PFA Security Asset Management, Inc. (PFA) has engaged Global Relay to provide e-mail archiving services for the firm. Accordingly keywords have been established to flag e-mails for review. A random sampling of e-mails not containing keywords also will be flagged and reviewed. Reviews will be performed approximately monthly by our Chief Compliance Officer and results documented and memorialized at PFA's Operations Committee Meetings. Emails requiring further review with a representative will also be documented.This Corrective Action is submitted by the Respondent. It does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff. .
In accordance with the terms of the AWC, FINRA imposed upon PFA a Censure and a $20,000 fine.