The Financial Industry Regulatory Authority has fined Raymond James Financial Services $2 million for failing to maintain reasonably designed supervisory systems and procedures for reviewing e-mail communications. In addition, Raymond James has agreed to conduct a risk-based retrospective review to detect potential violations evidenced in past e-mails.
According to FINRA, during a nine-year review period, Raymond James’ e-mail review system was flawed in significant respects, allowing millions of e-mails to evade meaningful review. This created the unreasonable risk that certain misconduct by firm personnel could go undetected by the firm, FINRA stated. The combinations of words and phrases—otherwise known as the “lexicon”—used to flag e-mails 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 e-mails flagged by the system, even as the number of e-mails increased over time, FINRA stated. 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 e-mails.
“Firms have a clear obligation to reasonably supervise electronic communications, which includes periodically re-evaluating the effectiveness of existing procedures," said Susan Schroeder, FINRA Executive Vice President, Department of Enforcement. “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 e-mail surveillance certain firm personnel who serviced customer brokerage accounts. Raymond James also failed to apply its entire lexicon to the e-mails of approximately 1,300 registered representatives who worked in branches that hosted their own e-mail servers.
This enforcement action serves as a warning for compliance officers to review FINRA's previously issued Regulatory Notice 07-59, which provides guidance concerning 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.