Articles Posted in Compliance

Cloud computing is the delivery of computing services (i.e., storage and network infrastructure and software-as-a-service (“SaaS”)) on the internet rather than your computer’s hard drive. Currently, cloud computing is considered a valuable asset to firms, industry wide. It is important to have Malecki Law’s FINRA Regulatory Lawyers in New York assist in ensuring your firm’s storage systems are sufficient. As a result, the Financial Industry Regulatory Authority’s (“FINRA”) Office of Financial Innovation (“OFI”) published a report addressing the results of a study regarding the state of cloud adoption within the securities industry. In drafting the report, FINRA obtained data from roughly 40 broker-dealer firms, cloud service providers, industry analysts, and technology consultants.

The report noted that cloud computing strengthens a brokerage firm’s ability to scale operations, generate business continuity solutions and quickly deploy products. Moreover, firms claimed that there are both benefits and challenges regarding agility, resiliency, costs, cybersecurity, staffing, and operations. Additionally, many firms claimed that migrating to the cloud may allow them to be more innovative and offer products at a faster speed. Firms also felt that cloud computing enables them to more efficiently scale computer usage to assist with the increase in IT resources.

As part of its recommendations, FINRA advised broker-firms that use third-party service providers that they have an ongoing responsibility to monitor and supervise the provider’s performance and create oversight procedures. FINRA also encourages companies and vendors to “re-evaluate their approach to security, including reviewing cloud misconfigurations and poor access controls; update data-related policies and procedures if a firm’s cloud adoption leads to changes in how it collects, stores, analyzes, and shares sensitive customer data; create, maintain, and annually review a written business continuity plan, in line with the FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information); consider the risk posed by cloud vendors and service providers; ensure that any data and information stored in the cloud is compliant with Exchange Act Rule 17a -4, and are preserved in a non-rewriteable and non-erasable format.”

Brokerage firms owe its clients the duty to supervise its employees and personnel. This is a very important duty in the financial industry, as it ensures the associated persons under the brokerage firm’s umbrella are compliant with FINRA’s rules. Firms should maintain its duty to supervise, and ensure that it has adequate procedures in place to prevent any potential misconduct that would be harmful to its clients. If your brokerage firm had inadequate supervisory procedures in place, the firm may be subject to failure to supervise claims. You need a New York Securities Industry Lawyer like the lawyers at Malecki Law.

A faulty compliance system can rise to the level of a failure to supervise. Broker-dealer Joseph Stone Capital (JSC) apparently dealt with exactly that. FINRA found that the firm’s compliance system had been insufficient in supervising its brokers, from January 2015 through June 2020. Specifically, JSC received exception reports that revealed potential excessive trading red flags. However, JSC failed to further investigate or prevent such activity.

To prevent this problem from occurring, a JSC supervisor responsible for reviewing the exception reports should have reviewed the clearing firm’s exception report daily. That supervisor would have discovered the possibility of excessive trading. If your brokerage firm failed to further investigate or prevent misconduct like JSC, it may be prone to failure to supervise claims. You need a Regulatory Defense Law Firm in New York, like Malecki Law. Additionally, after discovering these excessive trades, management should have questioned the broker about this trading activity, instead of restricting commissions. Supervisors should have reviewed every trade confirmation in the accounts in question and evaluated whether the trades were solicited (where the broker recommended the trade) or unsolicited (where the client recommended the trade). If the confirmations stated “solicited”, then management could ask for the broker’s thought process for making these trades. This would have identified the crux of the issue more efficiently and would have led to a quicker resolution. One can argue that JSC should improve its compliance software, but the software was not truly at issue during this investigation. According to all evidence, the compliance software seemed to work. The FINRA Order shows that the problem truly stemmed from JSC’s supervisors’ failure to act accordingly to stop their brokers’ activities of excessive trading. If your brokerage firm failed to act accordingly when discovering potential broker misconduct, it may be susceptible to failure to supervise claims. You need a Regulatory Defense Attorney in New York, like the lawyers at Malecki Law. It is unclear how JSC’s compliance software works, but they could also look to incorporate artificial intelligence and machine learning to generate quicker and more accurate compliance reports.

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