Enforcement actions against FINRA member firms for recordkeeping violations involving off-channel communications were settled by FINRA member firms on substantially similar terms between 2021 and 2024.

In January 2025, additional enforcement by the SEC resulted in settlements by FINRA members that included significantly less burdensome terms.

And this, according to a blog post co-authored by Robert Cook, FINRA’s president and CEO, and Greg Ruppert, its executive vice president, member supervision, has resulted in divergent outcomes for member firms.

The divergence he describes can be summarized as follows:

	Pre-2025 settlements	January 2025 settlements
Membership continuance application (MC-400)	Yes	No
Heightened supervision plan (HSP)	Yes	No
FINRA and other SRO membership continuance reviewed and approved by SEC	Yes	No
Written acknowledgement from SEC before membership continuance is deemed effective	Yes	No
Examination of firm’s control and compliance with the HSP	Yes	No

FINRA work with firms

In response to the consequences of the earlier settlements, FINRA has had to work with member firms to adjust the way it processes the unusually large number of incoming membership continuance applications. It has:

• developed a standardized HSP template to promote consistency and equal treatment across firms as well as clarify on the provisions that would be required and examined;
• set a time limit for the duration of these HSPs (as in other matters HSPs are typically unlimited in duration); and
• reduced the number of follow-up exams undertaking to review compliance with the HSPs.

A petition by the firms settling before 2025 to align the terms of their settlements with those of the firms settling in January was recently rejected by the SEC, however.

As a result of the SEC rebuffing this request, the HSPs applying to these two distinct groups of firms cannot be aligned. This is because of the differences built into the SEC settlements themselves, as well as the inability of FINRA to eliminate the HSPs altogether for the firms that had settled earlier.

The authors highlight the fact that FINRA “has long emphasized the importance of compliance with applicable recordkeeping requirements,” but they argue that the different collateral consequences for member firms merit “special consideration” in this instance.

Reasons for modifying HSPs

They list a number of such considerations that militate for modifying the HSPs to “bring the two sets of firms closer in line in terms of their ongoing obligations as self-regulatory organization (SRO) members,” including:

• differing policy considerations applying to reopening settled enforcement actions vis-à-vis those associated with tailoring related collateral consequences;
• SEC orders applying to pre-2025 settling firms already include specific, mandatory undertakings that obligate these to remediate their compliance and supervisory systems including:
  • retaining an independent compliance consultant to conduct a comprehensive review of the firm’s policies regarding electronic communications and produce a detailed report on these for the firm and the SEC;
  • adopting the consultant’s recommended changes to policies and procedures;
  • requiring the consultant to assess the firm’s program to preserve electronic communications one year after the consultant submitted its report; and
  • requiring the firm’s internal audit function to conduct a separate audit to assess the firm’s progress in certain areas also covered by the consultant’s review.
• a large number of firms (77) settling very similar recordkeeping violations arising from an industry-wide compliance sweep rather than an individual firm’s misconduct that warranted heightened remedial measures;
• significant information received by FINRA regarding the work done by member firms to comply with SEC undertakings;
• the ability of FINRA to directly examine relevant firms on a risk-focused basis for compliance with applicable recordkeeping requirements;
• using information and data available to utilize overall examination resources more efficiently and effectively;
• close similarity between the underlying facts and violations between the settling firms suggesting similar ongoing SRO requirements should apply in the interests of fairness and consistency; and
• similar settlements not leading to comparable requirements by non-broker-dealer entities in the past, which also raises “another dimension of fairness.”

Response and call for dialogue

According to Cook and Ruppert, FINRA is currently working on “standardized amendments” to the HSPs applying to the pre-2025 settling firms in a consistent manner. This work includes consulting with other SROs and the SEC, as necessary, while also engaging with member firms regarding potential changes to their HSPs.

In concluding, the authors once again point to the important rationale underlying federal recordkeeping obligations, but they also call for engagement by the SEC with member firms, citing dramatic change in both relevant technologies and investor behaviors.

They also direct firms to FINRA Regulatory Notice 25-07, for which the comment period is open until June 13, 2025, as a good starting point for submitting commentary on “rules that affect member firms’ ability to operate a modern workplace using up-to-date business practices and digital technologies.”

Recalling Commissioner Peirce’s dissent

In April, Commissioner Hester Peirce dissented from the SEC’s denial of the motion submitted by 16 financial firms in order to have their recordkeeping settlements modified.

She asked rhetorically: “Why must the broker-dealer firms that settled before January 2025 submit continuing membership applications to FINRA and be subject to costly heightened supervision plans while the broker-dealer firms that settled in January 2025 are not?”

She made this observation because the 12 settlements at the end of the SEC’s off-channel communications sweep of cases did not include the same undertakings as the earlier ones, calling those later ones “less draconian and costly,” as described above.

In that vein, Peirce pointed out that the SEC’s Enforcement Division did not contest the assertion the firms make that FINRA’s rulings heightened the requirements to which they are subject (thanks to their settlement orders), and that this imposes a costly obligation in reality that goes beyond the parameters of the SEC’s requirements in their actual orders. If they could not refute the discrepancy, perhaps they could remedy it, she wondered.

GRIP Comment

Commissioner Peirce’s dissent is important because it called out the fact that shifting policy winds created a real discrepancy in the treatment of the same infractions. The result could, therefore, be seen as one that was inequitable.

FINRA is not able to change the outcome itself of course, but real credit goes to it for trying to address the consequences in a pragmatic and practical way. Most importantly and laudably it is trying to accomplish this within the letter of the law. 

Another thing that stands out to us here is that it illustrates one of the key strengths of a self-regulatory organization such as FINRA – the constant and continuous dialogue between it and its members. This feedback loop, when in balance, is an unique and critical aspect of its success as a membership body.