Advisor Domain: Email Archiving: The Broker-Dealer’s First Line of Defense with Regulatory Penalties

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Guest Post by Marianna Shafir, Esq.

The ongoing coronavirus pandemic notwithstanding, FINRA continues to proceed at full speed when it comes to penalizing financial advisors for noncompliance with recordkeeping and supervision obligations.  In particular, one recurring area where significant penalties can be imposed is with a financial advisor’s outside business activities (OBA).

Rising Risks of OBA Issues

Multiple instances abound, but as just one recent example of this, FINRA fined a financial advisor $5,000 because she exceeded the scope of her approved outside investment advisory business by charging asset-management fees.

The findings stated that the financial advisor in question created her own registered investment adviser (RIA) firm – of which she was the sole owner and employee – communicating via email to her broker-dealer that this business would only charge hourly fees and fixed, one-time financial planning fees. The firm approved her outside business based on these representations.

Subsequently, the advisor began offering a new service to her advisory clients where she would charge an annual 1.5% asset-management fee for managing variable annuity subaccounts. Not only did this advisor fail to disclose this new service and the associated fees to the firm, she allegedly made inaccurate statements in her annual compliance questionnaires to the firm via email.

While the financial penalties in this particular instance were not catastrophic, it is noteworthy that the penalties applied only to the financial advisor, with the advisor’s broker-dealer escaping unscathed.  Why?  In this case, the broker-dealer’s email archives were sufficiently comprehensive and clear in shielding the firm from the financial advisor’s outside business activities.

Robust Email Archiving to the Rescue

Put simply, broker-dealers can avoid being penalized by the regulators for wrongdoing among individual professionals if they can clearly demonstrate that they are proactively and sufficiently capturing and monitoring emails. 

As such, it is more important than ever for broker-dealers to understand how capturing and archiving electronic communications can be useful for defensive purposes, including detecting and addressing problems before they spiral into a very significant crisis situation.

Indeed, archived emails can serve as a first-line defense for broker-dealers when it comes to inoculating the broader business against wrongdoing among individual professionals.

Structuring the Right Process

At the end of the day, the goal of reviewing electronic communications – including emails – is to ensure that firm executives and financial advisors are not committing wrongdoing, including unauthorized outside business activities.

To support this goal, it is crucial to develop procedures that clearly identify the person or persons responsible for determining whether a violation has occurred and whether it is of a nature that requires reporting under regulatory rules.

These procedures should also document the level of seniority of the home office individuals (e.g., General Counsel, Chief Compliance Officer or a senior staff committee) responsible for determining if violations occurred.

From there, it is also important to establish a protocol for escalating violations, and potential violations, while also providing a process for reporting internal conclusions of the violations.

Minor violations can be resolved in-house while significant violations must be reported to FINRA and other authorities.

Remote Work Raises the Potential Stakes

With more employees working remotely, this is a good time to review your firm’s records retention policies, including email archiving.

This has never been more critical than it is today, as the pandemic has accelerated the digital experience and the volume of data. Broker-dealers must rethink how employees can best communicate and collaborate on a digital basis while staying compliant.


Marianna Shafir, Esq. is Corporate Counsel and Regulatory Advisor at Smarsh (www.smarsh.com), the leading communications compliance technology firm for wealth management firms and global financial institutions