FINRA to Propose Modifications to Supervision Plans on Pre-2025 Off-Channel Communications Settlements
Commentary by Steven Lofchie
FINRA said it plans to develop standardized heightened supervision plans to address pre-2025 settlements for off-channel communications violations.
In a news blog post, FINRA President and CEO Robert Cook and Executive Vice President for Member Supervision Greg Ruppert reported that 77 FINRA member firms settled matters with the SEC between 2021 and 2024 for recordkeeping failures involving off-channel communications. Those settlements triggered "statutory disqualification" and required the firms to submit membership continuance applications to FINRA and operate under heightened supervision plans reviewed by the SEC and other self-regulatory organizations.
The executives noted that off-channel communications settlements finalized in January 2025 involved similar violations, but imposed fewer requirements and did not impose an obligation to retain independent consultants or to report FINRA disciplinary actions to the SEC. They said the 2025 settlements also avoided triggering collateral agency consequences, meaning the affected firms did not have to submit membership continuance applications or implement with heightened supervision plans.
The executives stated that firms subject to the pre-2025 settlements petitioned the SEC to modify their settlements to match the terms of the 2025 agreements, but the SEC denied the request. While FINRA said it cannot eliminate heightened supervision plans for those firms due to the structure of the SEC settlements, it plans to revise the heightened supervision plans to focus solely on ensuring the firms complete the undertakings ordered by the SEC.
Commentary
The issue of "collateral consequences" is one that the regulators and Congress should examine. In many instances, a finding of a violation that is not of significance itself, and that is appropriately punished by the relevant regulator, can set off numerous provisions under the securities laws and in other laws and regulations that disqualify the firm from being able to provide services or conduct business subject to those laws or regulations.
At least where the SEC imposes a penalty for a violation, the imposition of collateral consequences under the securities laws ought not to be automatically imposed by the statutes. Rather, the statutes should provide the SEC with discretion to impose disqualifications or other collateral penalties where the relevant violation is material and where the imposition of the ordinary penalties (money, outside consultants) are deemed by the SEC to be insufficient to protect the public. To put this differently, collateral consequences should be the discretionary exception rather than the rule.