The Evolution Of FINRA E-Mail Disciplinary Cases


Law360, New York (April 19, 2010) -- In 2002, regulators for the first time brought enforcement actions against broker-dealers relating to e-mail issues. Since that time, as technology and usage have changed, these types of cases have evolved.

In the Beginning

Firm: “We’ve got mail!”

Regulator: “We want it.”

In December 2002, the U.S. Securities and Exchange Commission, NASD (now, FINRA) and the New York Stock Exchange brought the first e-mail enforcement actions against five broker-dealers, finding that they violated Section 17(a), Rule 17a-4, NYSE Rule 440 and NASD Rule 3110 by failing to preserve e-mail, and that they violated NYSE Rule 342 and NASD Rule 3010 by failing to establish, maintain and enforce supervisory systems reasonably designed to ensure compliance with the rules and laws relating to the retention of electronic communications. The fines totaled $8.25 million, or $1.65 million per firm.

At the time, many firms understood these rules to include e-mail but employed a manual “print to paper” system of e-mail preservation, requiring representatives to determine on a case by-case basis whether their e-mails needed to be retained, and to print out and file any e-mails that did. Many firms also had automated systems in place that would capture and store e-mail electronically on backup tapes in case of a system outage or other computer failure, but not for the purpose of production to regulators.

The securities regulators disagreed with the firms’ understanding of their regulatory requirements, and over the next few years, the regulators (and in particular, FINRA) brought dozens of cases for various failures to properly retain e-mail communications. Over time, these cases have evolved, and the more recent enforcement actions have implications that go well beyond the retention issues central to the early e-mail cases.


Rep: “IM, TM; Cn U rd ths?”

FINRA: “We don’t care if you call it LMNOP; we want all electronic communications.”

- Messages sent via instant messaging, Bloomberg e-mail and text messaging must be retained just like e-mail.

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