The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Cambridge Investment Research, Inc. concerning allegations that from January 2009, to July 2010, Cambridge failed to ensure that the firm preserved, maintained, and reviewed the business emails of two of its registered representatives. FINRA found that during this time Cambridge was relying upon its representatives to forward copies of their emails but did not have effective procedures reasonably designed to ensure that the representatives actually forwarded emails in violation of FINRA supervision rules.
Cambridge has been a FINRA member since December 1995 and has 3,044 registered individuals in 1,530 branch offices.
The duty to supervise has been held to be a critical component of the securities regulatory scheme. Supervisors have an obligation to employ systems and processes designed to ferret out wrongful behavior. In addition, firms must respond vigorously to indications of irregularity, commonly referred to as “red flags” of misconduct.
The importance of proper supervision can be seen in the various types of securities misconduct that the supervision is meant to protect. Brokerage firms are responsible for monitoring a broker’s investment recommendations to clients, outside business activities, and representations to investors in to ensure that a broker’s interaction with clients is appropriate and to prevent wrongful behavior. Failure to implement systems that can gather information concerning the broker’s interaction with customers deprives the firm of the ability to monitor conduct and may allow unsupervised brokers to commit securities fraud.
In this case, FINRA alleged that Cambridge’s written supervisory procedures required registered representatives to copy their email correspondence to a Cambridge email address and to forward hard copies to the home office using a firm-created “Correspondence Transmittal Form.” Additionally, FINRA found that Cambridge’s policies required auditors to confirm that registered representatives who used Outlook-based email systems implemented a setting that would automatically send all incoming and outgoing email to Cambridge
However, FINRA found that these procedures did not ensure that the representatives forwarded all business-related emails as required by the firm’s procedures. Moreover, FINRA found that the rules requiring transmittal of only “incoming and outgoing securities related client correspondence” flawed because NASD Ru]e 3010(d) requires firms to review and retain all communications with the public, a much broader requirement.
The securities attorneys at Gana LLP have handled claims concerning the failure of brokerage firms to properly supervise their employees. Our consultations are free of charge and the firm is only compensated if you recover.