A series of enforcement actions against dozens of U.S. brokerage firms for conducting business over private text or in unmonitored apps, such as WhatsApp, had consequences for the firms’ self-regulatory status — and is also highlighting the need to modernize the industry’s archaic recordkeeping requirements, the U.S. Financial Industry Regulatory Authority Inc. (FINRA) says.
FINRA reported that the U.S. Securities and Exchange Commission’s (SEC) enforcement actions against 77 brokers for so-called “off-channel communications” — which were executed between 2021 and 2024 — included terms that have implications for the firms’ SRO status.
“The details are complicated, but generally speaking, each firm became ‘statutorily disqualified,'” the SRO noted — which meant these firms had to apply to FINRA to remain members of the SRO and had to submit to heightened supervision, among other conditions.
In January of this year, the SEC brought more enforcement actions over the same kind of conduct, but these settlements didn’t include sanctions that have the same consequences for the firms’ SRO status.
“A group of firms settling before 2025 petitioned the SEC to modify their settlements to align with the January firm settlements,” FINRA noted.
But the SEC recently denied this petition, it reported.
“Following the SEC’s decision … FINRA believes it would be appropriate to modify the existing [compliance plans] for firms that settled pre-2025 with the various SEC undertakings,” it said.
Proposed changes to these compliance plans won’t put these firms in exactly the same position as the firms in the more-recent settlements, the SRO said, but they do aim to better align the ongoing obligations of both groups of firms.
“The underlying facts and violations between the pre-2025 settling firms and the 2025 settling firms are very similar, suggesting that as a matter of fairness and consistency these firms should be subject to similar ongoing SRO requirements,” it said.
FINRA said that it will consult with the SEC and other SROs, along with the affected firms, and is revising the ongoing compliance demands.
Additionally, the SRO stressed the need to revisit regulatory recordkeeping requirements, given the relentless evolution of technology and communications.
To that end, FINRA said that it believes that “it would be useful to engage with member firms and the SEC to consider how these objectives can best be achieved in a world where the relevant technologies and investor behaviours have changed dramatically since the recordkeeping rules were adopted.”
Last month, FINRA solicited comments on rules that affect firms’ ability to use modern practices and technologies to run their businesses. That consultation is ongoing. Its deadline is June 13.