FINRA is looking to lighten the supervision burden on nearly 80 firms that reached settlements before the start of the year over messages sent using WhatsApp and other texting systems.
In a blog post last week, Financial Industry Regulatory Authority executives said they’re considering revisions to the “heightened supervisory plans” that 77 industry firms were subjected to as part of settlements reached over their use of so-called off-channel communications. The Securities and Exchange Commission, along with the Commodity Futures Trading Commission, have hit wealth managers large and small with more than $3 billion in fines since 2021 for not doing enough to track and record their representatives’ electronic messages to colleagues and clients.
Concerns over fairness gave rise to FINRA’s proposal to modify the regulatory requirements imposed on firms that reached settlements pre-2025. FINRA’s blog post, written by CEO Robert Cook and Executive Vice President Greg Ruppert, notes that firms that reached settlements after the start of this year were subject to far less onerous terms.
For instance, firms that entered into deals with the SEC in previous years are required to bring in outside consultants to monitor their compliance with rules governing off-channel communications. But that wasn’t the case for eight firms that agreed in January to pay $63.1 million to resolve allegations that they had not done enough to track their employees’ electronic messages.
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Those companies, which included Charles Schwab, Blackstone and the private equity giant KKR, avoided various other mandates imposed on other firms. They, for instance, don’t have to file an application to continue their membership in FINRA and agree to a heightened supervision plan (HSP) meant to prevent further violations.
“The underlying facts and violations between the pre-2025 settling firms and the 2025 settling firms are very similar, suggesting that as a matter of fairness and consistency these firms should be subject to similar … requirements,” according to Cook and Ruppert’s blog.
No, things can’t be made completely equal
The settlement in January was the first the SEC has reached over off-channel communications after President Donald Trump ushered in a distinctly lighter approach to regulating the securities industry. Various compliance experts have said communications violations are exactly the sort of “penalty only” cases — with no allegations of investor harm — that regulators are likely to eschew in the new Trump administration.
The blog does not list specific changes FINRA is considering making to firms’ heightened supervision plans. Clint Stiger, the associate director at the consulting firm Compliance Risk Concepts, said that although FINRA can’t eliminate the heightened supervision plans, it does seem to think it can change them so they’re “of no practical consequence.”
“Firms may want to monitor the outcome of this action for a potential roadmap in future enforcement situations,” Stiger said.
FINRA’s blog cautions that the contemplated changes won’t make things equal between firms that reached settlements this year and those that did before.
“FINRA cannot do that because of the differences built into the SEC settlements,” according to the blog. “In addition, under applicable rules FINRA cannot eliminate the HSPs altogether for the pre-2025 settling firms.”
Are heightened supervision plans needed?
Unlike reviews by outside consultants, heightened supervision plans are carried out internally by brokerages, said Amy Lynch, the founder and president of the regulatory consultant FrontLine Compliance. FINRA, she said, usually has to come in and make sure firms are doing what they’ve agreed to do.
“So it was a lot more work for everyone involved,” Lynch said.
As Cook and Ruppert note in their blog, FINRA’s workload has also increased owing to the need to approve applications to remain in the industry from each of the firms that reached settlements with the SEC. In normal years, FINRA would process fewer than five of these applications.
Lynch said she thinks the heightened supervision plans are largely unnecessary. She said most firms have brought in technological systems to track and capture electronic messages sent by their brokers.
“Once you have the right technological solution, there really is no need for this heightened supervision once it’s in place,” she said.
But Joe Wojciechowski, an investment fraud lawyer at Chicago-based Stoltmann Law, said brokers and their clients always seem to find a way to send messages to each other outside the approved channels.
“Texting has become a part of the culture. It has become ingrained,” Wojciechowski said. “The best you can do is make sure your financial advisors are using a specific service like Signal so their messages can be logged just like email can be.”
Brokerage firms strike back
The broker-dealer industry has tried in various ways to push back against the SEC’s crackdown on off-channel communications. In June, the American Securities Association sued the SEC over allegations that its requests for information on how regulators were setting their fines were being improperly rebuked.
Some of the firms that reached settlements with the SEC before this year also submitted a petition asking for modifications to their deals. The SEC rejected that appeal last month, in part noting that all the firms that reached settlements had done so voluntarily.
“The Respondents negotiated and made a choice to accept the terms of their orders, accepting the risk that comparable cases later could reach different outcomes,” the SEC wrote.
Adam Gana, a securities lawyer and the president of the Public Investors Advocate Bar Association, said reopening the terms of old settlements defeats the purpose of reaching these deals in the first place.
“You can’t say one, two, three, five years later I don’t want to be part of this,” said Gana, who’s also the managing partner of the New York-based firm Gana Weinstein. “Settlements are supposed to be binding and final. That’s part of the benefit of settling.”
FINRA can’t reopen the settlements on its own
Cook and Ruppert wrote in FINRA’s blog that they were initially planning to ask the SEC to eliminate heightened supervision plans for member firms fined for off-channel violations. But that can’t be done now that the SEC has rejected the request to modify the initial settlements.
FINRA, a self-regulatory organization deputized by the SEC to oversee the brokerage industry, has no power to alter SEC deals on its own.
“But there are several reasons why it would be appropriate in the special situation presented here — and consistent with the public interest and investor protection — to modify the [heightened supervision plans] in a manner that would bring the two sets of firms closer in line …,” according to the blog.
Even with modified heightened supervision plans, the firms that reached settlements before the first of the year will still have to abide by other SEC requirements. They, for instance, will still have to bring in outside consultants to review their compliance policies and procedures and recommend changes. The third parties then must conduct a review a year later to see what the firms are doing to track and preserve electronic communications.
“Regardless of the terms of any HSP, FINRA still will be able to directly examine relevant member firms, on a risk-focused basis, for compliance with applicable recordkeeping requirements …,” according to the blog.
Cook and Ruppert said in their blog that FINRA is now consulting other self-regulatory organizations and individual brokerage firms about its proposed changes, in addition to the SEC. Any changes will apply equally to all firms that reached settlements over off-channel communications before the start of the year.
Now the question is just how far the SEC will allow FINRA to go, Lynch said.
“The real work will be between FINRA and the SEC,” she said. “That’s where the real negotiation is.”
