Is FINRA focusing on fairness by reducing HSP compliance burdens?
The SEC's January 2025 settlements for off-channel comms violations introduced lighter compliance terms, creating a divergence between earlier enforcement actions that imposed stricter membership oversight requirements on FINRA firms. After the SEC's rejection of a petition to review the pre-2025 settlements, FINRA is now looking to level the field by easing collateral consequences.
Written by a human
In brief:
- The Securities and Exchange Commission (SEC) rejected appeals to modify earlier settlements despite following a less punitive settlement structure in January 2025
- Pre-2025 settlements imposed stringent heightened supervision plans (HSPs) and rigorous membership continuance reviews, while January 2025 settlements were not subject to the same scrutiny
- FINRA is reviewing and standardizing current HSPs to align with recent settlement terms while encouraging engagement with member firms
From 2021 to 2024 the Securities and Exchange Commission (SEC) penalized a plethora of Financial Industry Regulatory Authority (FINRA) member firms for breaking recordkeeping rules, with violations pertaining to off-channel communications (OCCs) spanning texts, WhatsApp communications, and audio files.
Though this is nothing new from the SEC in the fight against OCCs, a January 2025 settlement in which 12 firms paid a combined penalty of $63.1 million due to recordkeeping failures has gained traction, as it has highlighted a change in collateral consequences and ongoing compliance responsibilities for firms.
Sixteen firms subject to the 2021-2024 settlements called for the SEC to modify their agreements, citing that the January 2025 settlements saw “significantly less burdensome terms”. However, the SEC rejected their request and denied their petition, staying true to their commitment to maintaining “the finality of settlements and need for ‘extraordinary’” circumstances to modify a Settled Order, it is clear the SEC is undergoing a strategic shift – and now FINRA is taking action that might encourage those firms suffering “settler’s remorse”.
Pre-2025 settlements walked so January 2025 settlements could run
FINRA’s President and CEO, Robert Cook, and Executive Vice President, Greg Ruppert, recently outlined the divergence of settlements between the pre-2025 and January 2025 settlements. Noting they key differences as:
- In the pre-2025 settlement orders, firms became “statutorily disqualified” under the Exchange Act and were obligated to apply for “membership continuance” with FINRA. The January 2025 settlement firms were not
- Pre-2025 settlement firms were subject to heightened supervision plans (HSPs), while the post-January 2025 weren’t
- Pre-2025 settlement firms had FINRA, and other self-regulatory organization (SRO) memberships continuance reviewed and approved by the SEC, while these reviews did not take place in post-January 2025 settlements.
- For pre-2025 settlement firms, the SEC was required to provide a written acknowledgment before membership continuance came into effect
- For pre-2025 settlement firms, FINRA must examine firm’s controls and compliance with HSPs, while there was no ongoing examination process for post-January 2025 settlements
- Pre-2025 settlement firms required firms to retain an independent consultant or to report to the SEC any disciplinary actions taken against employees, while firms under the more recent settlements were not under this obligation
Many in the financial space felt that the pre-2025 settlements were harsher than the January 2025 ones, even though they were for similar violations. This can be attributed to a change in settlement structure, which saw the elimination of many of the collateral consequences, as part of a wider strategic shift from the SEC to simplify enforcement processes and possible efficiency reasons, where the previous process proved to be cumbersome.
Harsh, but fair?
Financial regulators must walk a tightrope, caught between their need to protect investors and market and to ensure they regulate the activities of firms fairly. FINRA has made clear that, if the SEC had granted and approved the petition from those 16 firms to modify the pre-2025 settlements, FINRA was prepared to terminate their HSPs, ensuring consistent and fair application of approach between regulators.
FINRA is instead looking to alter the HSPs to bring them closer in line with post-2025 requirements, which may focus on reducing indefinite oversight and streamlining compliance expectations. These “standardized amendments’ aim to ensure consistency, and include consultation with other SROs and the SEC, alongside engaging with member firms around potential changes to their HSPs. Here, as ever, compliance is reached through collaboration – between regulators and the firms they govern.
While firms that are found to have breached off-channel communications and recordkeeping regulations may face less of an ongoing “compliance burden” from future FINRA and SEC settlements, it bears repeating that those looking to secure the best outcomes should be leveraging the right compliance technology to ensure they don’t have to reach regulatory settlements in the first place.
While regulators weigh up the potential terms of future settlements for off-channel communications and recordkeeping violations, firms looking to stay afloat on the changing tide of regulation need communications compliance and archiving solutions that can count on.
