FINRA member firm fined $1.5m over business comms failings

Examples include breaches over recordkeeping, supervision of personal messaging and conflicts of interest.

H.C. Wainwright & Co., LLC (Wainwright), a FINRA member firm, has been censured and fined $1.5m for failing to preserve business-related communications. In addition to the fine and censure the firm has also been required to revise “its supervisory systems, policies, procedures and trainings” connected to the rules violated.

John Chambers (Chambers), head of investment banking and president, as well as Robert Kristal (Kristal), former director of research, have each been fined $15,000 and suspended from association with any FINRA Member in all capacities for 30 days.

In an interesting wrinkle, Kristal is no longer registered or associated with any FINRA member firm, but is subject to FINRA’s jurisdiction pursuant to FINRA By-Laws Article V, Section 4(a). Under this Article jurisdiction over formerly registered members is retained by FINRA so long as a complaint against them is filed within two years of the termination, revocation or cancellation of their registration.

The firm and the two employees have consented to the sanctions without admitting or denying the findings.

Personal phones used by staff

The firm’s written supervisory procedures (WSPs) prohibited the use of text messages for business-related communications and the firm’s compliance department highlighted this policy “several times each year”. Despite this, in its investigation FINRA found that between September 2017 and September 2020 at least 24 Wainwright employees, including senior members of the firm’s management, communicated about firm business in text messages on their personal phones.

According to FINRA management was aware that employees were using text messages for business-related communications because the management team itself was texting “each other and others about firm business”. Chambers and Kristal, for example, “routinely exchanged text messages about firm business with each other”.

The vast majority of the messages could not be retrieved, which constitutes a failure to preserve business-related communications in contravention of §17(a) of the Securities Exchange Act of 1934, Exchange Act Rule 17a-4, and FINRA Rules 4511 and 2010.

Supervision failings

The firm failed to effectively enforce its WSPs and take reasonable steps to prevent the use of text messaging for business-related communications or to effectively supervise these.

The firm also failed to reasonably supervise email communications because the firm’s WSPs did not “reasonably describe or address”:

  • the type or scope of reviews that needed to be conducted;
  • who was responsible for conducting the reviews; and
  • how and under what circumstances emails should be escalated.

FINRA found that “in many instances” a review of the email communications did not take place “for more than a year after an email was sent or received.

All these supervision failures violated FINRA Rules 3110(a), (b)(1), (b)(4) and 2010.

Conflicts of interest

According to the firm’s policies, in order to avoid conflicts of interest, business-related written and verbal communications between research and investment banking personnel were prohibited unless chaperoned by compliance personnel.

Despite this, FINRA found that “Chambers and Kristal often communicated with each other about firm business in text messages and on unchaperoned phone calls” using their personal calls. This was in violation of FINRA Rules 2241(b)(1), (b)(2)(G) and 2010.