Forensic Update

Reflections on information management within the legal and regulatory arena

FINRA Fines Firm $1.2 Million for Failure to Archive Email Properly…

Posted by Johnny Lee on October 4, 2010

Email ArchiveIn November of 2009, the Financial Industry Regulatory Authority (“FINRA”) reached a settlement with Metlife Securities Inc. and three related broker-dealers (referred to collectively as “MetLife” herein) for the failure to implement supervisory systems required to meet compliance obligations.  The “settlement,” known as a Letter of Acceptance, Waiver and Consent (“AWC”) is a mechanism provided under the FINRA Rule 9216 to permit the resolution of a controversy involving a member or associated person over a violation of of any rule, regulation, or statutory provision that FINRA has the jurisdiction to enforce.

What is remarkable about this AWC is that it imposed a fine of $1.2 million substantially because MetLife failed to meet their compliance obligations related to the review of electronic mail (“email”) correspondence.  Put differently, FINRA levied this fine because MetLife did not follow its own written policy on matters related to email archiving and the review of archived email.

In 2006, MetLife implemented a sophisticated email archiving solution, which sought to align  technology with existing business processes and written policy guidance (whereby management would monitor brokers’ email correspondence with the public as well as broker participation in outside business activities).  At issue in the AWC is the period before this technology acquisition (from March 1999 to December 2006), when “the firms did not have a system in place that enabled supervisors to directly monitor the email communications of brokers.”  Simply put, prior to 2007 the policy was bulletproof but the practice was lacking.

In the news release commenting on the FINRA ruling, Susan Merrill (FINRA Executive Vice President and Chief of Enforcement) was quoted as saying that although FINRA’s rules “afford firms the flexibility to tailor procedures that are appropriate for their particular business models, all firms must have the ability to flag emails that may evidence misconduct.”  She went on to comment that having a “system” that placed the primary reliance on “brokers to provide copies of their own emails to supervisors for review is hardly an effective means to detect such misconduct.”

Students of the evolving electronic discovery case law should see a familiar motif as it relates to the intolerance of form over function.  From Zubulake to Qualcomm to what eDiscovery guru Ralph Losey has aptly deemed “Victor Stanley II,” we see the judiciary adopting this same lack of patience for organizations that believe that a written policy alone is sufficient to meet its compliance burdens.  In both regulatory and litigation1 arenas—whether monitoring email for misbehavior or preserving data in a defensible manner, daylight between policy and practice can be costly.

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1 For a very good example of a company receiving untoward attention from the courts for email retention practices that do not pass the straight-face test with regard to evidence preservation, please see Apple Inc. v. Psystar Corporation matter from the Summer of 2008.   In particular, please see the Case Management Statement (filing 28; page 7 therein) from this case filed by Apple in late 2008. This filing describes the evidence preservation practices at Apple that the court later found less than adequate—especially in light of Apple’s status as a purveyor of enterprise-class storage hardware and software.  Click here for other examples of companies fined for inadequate archiving / preservation practices.


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One Response to “FINRA Fines Firm $1.2 Million for Failure to Archive Email Properly…”

  1. […] FINRA Fines Firm $1.2 Million for Failure to Archive Email Properly… […]

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