Finra Fines Raymond James $2 Million for ‘Significant’ Email Issues
The Financial Industry Regulatory Authority on Thursday fined Raymond James Financial’s independent broker-dealer unit $2 million, citing nine years of flawed supervision of brokers’ emails that allowed at least one broker to engage in fraudulent transactions.
“Raymond James’ email review system was flawed in significant respects, allowing millions of emails to evade meaningful review,” the self-regulatory agency said in a press release highlighting the acceptance, waiver and consent letter that the Florida-based firm signed. “This created the unreasonable risk that certain misconduct by firm personnel could go undetected by the firm.”
The letter cited the broker-dealer’s failure to respond to at least 16 separate email threads that could have indicated that one of the firm’s brokers was engaging in approximately $1 million worth of fraudulent private securities transactions, which resulted in “substantial losses to some of his customers,” the letter said. It did not identify the broker.
The sanctions, which Raymond James agreed to without admitting or denying FInra’s findings, also included a censure and agreements by the firm to undertake a “risk-based retrospective review” of brokers’ emails within 180 days.
The fine indicates the significance that regulators put on document review and storage to help further enforcement priorities, which currently include a crackdown on brokers’ unauthorized outside businesses and securities activities. In 2007, Morgan Stanley paid $27.5 million to securities regulators for failing to produce emails in numerous arbitration claims and SEC investigations.
Raymond James from December 2007 to September 2017 operated a flawed process for flagging emails based on specific words or phrases, according to Thursday’s consent letter. The phrases are meant to detect risky behavior, including language that could have indicated brokers were experiencing financial distress, borrowing from or lending to customers, or soliciting penny stock transactions in violation of firm rules.
As part of the settlement, Raymond James agreed to update its email review lexicon.
The settlement letter spells out to compliance professionals a need to keep their priorities straight.
“[T]he firm’s primary focus was reducing the number of ‘false positives’ that would need to be reviewed rather than ensuring that the system was effectively identifying all potentially problematic categories of emails,” the letter says.
A spokesperson for Raymond James did not return a request for comment.
The consent letter said that Raymond James Financial Services also devoted inadequate personnel and resources for reviewing flagged e-mails, failed to apply its primary lexicon review to emails of about 1,300 brokers who worked in branch offices that had their own email servers and “unreasonably excluded from email surveillance…including personnel in its headquarters who serviced customer brokerage accounts in addition to their other responsibilities.”
As of September 30, about 4,305 of the 7,346 brokers at Raymond James Financial were affiliated with its independent unit.
The $2 million fine follows Raymond James Financial’s agreement with Finra in May 2016 to pay $17 million to settle charges of “systemic” failures in its anti-money laundering compliance systems for both its employee and independent brokerage units. In 2012, the St. Petersburg-based firm reached a $400,000 regulatory settlement over its alleged failure to detect suspicious transactions that would have indicated one of its customers was running a Ponzi scheme.