Last week FINRA announced that it had censured and fined Little Rock, Arkansas-based investment bank Stephens, Inc. $900,000 for inadequate supervision of internal “flash” emails sent by research analysts communicating information about companies under coverage. FINRA argued that these emails could contain material nonpublic information that might be misused by salespeople or traders in their interactions with clients.
Stephens’ Flash Email Program
Stephen’s initially created its “flash” email program as an easy and quick way for analysts to share publicly available news and insights regarding covered companies with its sales and trading staff which could be used in discussions with clients interested in these firms.
FINRA discovered that between August 2013 through January 2016, Stephens did not adequately supervise the content nor the dissemination of flash emails sent out by the firm’s research analysts. In addition, FINRA concluded that Stephens failed to establish, maintain, and enforce adequate written supervisory procedures concerning trading in connection with these flash emails.
In addition, FINRA found instances where staff forwarding flash emails marked “internal use only” to clients, and situations where employees cut and pasted the text of an internal-use email into a separate communication sent to a customer.
In at least one instance, FINRA also found that content from an unapproved, draft research report was cut and pasted into a flash email. Despite the fact that these practices were contrary to the firm’s compliance policies, FINRA found that Stephens lacked effective monitoring or supervisory systems to detect or prevent breaches of these policies.
As a result of this action FINRA censured Stephens for its failure to adequately supervise its “flash” email program and fined the firm $900,000. In addition, Stephens agreed that it would cease to distribute flash emails and would implement a comprehensive review of its compliance policies, procedures, and training around its research operations. In settling this matter, Stephens neither admitted nor denied the charges.
Based on Integrity’s experience, the fine against Stephens Inc. is not very surprising. This was clearly a case where research management created an extremely logical process to try and enhance communication between research, sales, and trading staff. Unfortunately, the firm didn’t see the potential risks this new program could create, and therefore didn’t mandate that their compliance department oversee the new program.
Over the years, Integrity has worked with many other research firms that have overlooked the important role of compliance when developing new research processes and procedures. Hopefully, other sell-side and independent research firms will learn from Stephens’ recent mistake, and will implement and maintain appropriate compliance controls to mitigate business and regulatory risk, while they also work to enhance their research operations.