More On Legal & Compliancefrom The Advisor's Professional Library
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Probably like many of you, I read with fascination Melanie Waddell’s story last week about LPL getting fined $9 million by FINRA for failing to save and monitor its reps’ emails. It seems over the past five years, the Boston-based independent broker-dealer’s systems failed to save reps’ emails 35 times, making it impossible for the firm to monitor some advisor emails, allow FINRA auditors to examine some emails, and for LPL to provide some emails to clients who were suing the firm.
OK, that sounded kinda bad, but stuff happens, you know? Especially when it comes to technology. If I got fined every time I lost an email or a file I’d be in trouble. And $9 million for a couple dozen emails? That seemed a little harsh.
So my curiosity was piqued and I read on. It seems LPL’s problem was a bit bigger than I realized: according to FINRA, the firm failed to supervise 28 million emails, let another 80 million emails get “corrupted,” and “failed to maintain access to hundreds of millions of emails.” Yes, you read that right: hundreds of millions of emails.
At this point, I’d pretty much forgotten about the $9 million, as my brain was stuck on the volume of emails. Since FINRA specified these numbers rather than saying LPL lost all its rep emails, and this was only over a five-year period, I went right to the question of how many emails is LPL expected to archive—possibly billions.
Now I’m usually a proponent of more brokerage regulation rather than less—and of increased FINRA oversight to enforce it. But in this case, I have to admit, it seems as if maybe FINRA should lighten up on the accusations and fines, and work with the brokerage firms to find better solutions to what seems to be a huge—and snowballing—problem: even if brokerage firms could afford to keep updating their technology to archive and retrieve the growing volume of emails, how could they possibly “monitor” billions of advisor emails?
I’ve written before on the growing volume of emails we all get, and the resulting time drain that results from even reading them all. To get a better handle on the real scope of the email “problem,” I did a little research on the Internet. Surprisingly, there’s scant information on the Net about email volumes, and, not so surprising, most of what’s there is about marketing.
But here’s what I was able to find: According to a report by the Internet research firm The Radicati Group in Palo Alto, Calif., as of April 2012, there were 2.5 billion email users worldwide, sending some 145 billion emails every day, which works out to 58 emails per day each, 21,170 emails per year each, and some 53 trillion emails every year altogether. As for growth, in 2010, there were 1.8 billion users, which means we’re up 700 million users or a 39% gain in two years. Radicati’s figure indicate that by 2016, we’re looking at a 32% increase in users and in today’s volumes, which means in three years, we could be dealing with in the neighborhood of 70 trillion emails a year.
The bottom line: We’re talking about one heck of a lot of emails for BDs to save and supervise. And that number’s only going to get bigger. I suppose FINRA can just keep fining firms as their systems continue to struggle to keep with the ballooning volume of emails—and use the proceeds to underwrite their entire operation.
In the past ten years, in addition to LPL, FINRA seems to have fined at least other four firms for email violations (Morgan Stanley, $10.6 million in 2005; MetLife, $1.2 million in 2009; Piper Jaffray, $700,000 in 2010; and ING, $1.2 million in February of this year). Or maybe it could get beyond its bureaucratic mentality, and work with its member firms to find realistic solutions to a problem that’s clearly on the verge of spinning out of control.