The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Raymond James Financial Services, Inc. $2 million for failing to maintain reasonably designed supervisory systems and procedures for reviewing email communications. In addition, Raymond James has agreed to conduct a risk-based retrospective review to detect potential violations evidenced in past emails.
FINRA found that during a nine-year review period, Raymond James’ email review system was flawed in significant respects, allowing millions of emails to evade meaningful review. This created the unreasonable risk that certain misconduct by firm personnel could go undetected by the firm. The combinations of words and phrases – otherwise known as the “lexicon” – used to flag emails for review were not reasonably designed to detect certain potential misconduct that Raymond James, in light of its size, structure, business model, and experience from prior disciplinary actions, knew or should have anticipated would recur from time to time. The firm also failed to devote adequate personnel and resources to the team that reviewed emails flagged by the system, even as the number of emails increased over time.
FINRA also found that Raymond James did not periodically test the configuration and effectiveness of its lexicon-based email surveillance system. The 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.
Susan Schroeder, FINRA Executive Vice President, Department of Enforcement, said, “Firms have a clear obligation to reasonably supervise electronic communications, which includes periodically re-evaluating the effectiveness of existing procedures. They should also assess whether their e-mail review and supervisory systems are reasonably designed in light of each firm’s business model.”
In addition, FINRA found that the firm unreasonably excluded from email surveillance certain firm personnel who serviced customer brokerage accounts. Raymond James also failed to apply its entire lexicon to the emails of approximately 1,300 registered representatives who worked in branches that hosted their own email servers.
FINRA previously issued Regulatory Notice 07-59 which provides guidance regarding the review and supervision of electronic communications.
In settling this matter, Raymond James neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.