SEC Off-Channel Communications Settlements—SRO Collateral Consequences

By Robert Cook, President and CEO, and Greg Ruppert, Executive Vice President, Member Supervision, FINRA.

From 2021 to 2024, the SEC brought enforcement actions against numerous FINRA member firms for recordkeeping violations involving off-channel communications (OCCs) and settled them on substantially similar terms. In January 2025, the SEC brought additional OCC-related actions against other member firms but settled these on significantly less burdensome terms. A group of firms settling before 2025 petitioned the SEC to modify their settlements to align with the January firm settlements. The SEC recently denied this petition. 

Although FINRA had no input into the terms of the OCC settlements between the firms and the SEC, the pre-2025 settlements ordered undertakings that triggered collateral consequences for the firms with respect to their membership in FINRA and other self-regulatory organizations (SROs). As described below, following the SEC’s decision, FINRA will consult with the SEC and other SROs to modify these collateral consequences, consistent with investor protection considerations. 

Pre-2025 Settlements

Between 2021 and 2024, 77 FINRA member firms settled enforcement actions with the SEC for failing to maintain certain OCCs in accordance with Exchange Act recordkeeping requirements. These settlements imposed consistent undertakings on the firms, such as engaging an independent compliance consultant and reporting to the SEC when employees are disciplined for OCCs. 

In addition, these settlements were structured in a manner that triggered collateral consequences for each firm’s membership with FINRA and other SROs. The details are complicated, but generally speaking, each firm became “statutorily disqualified” under the Exchange Act and was obligated to apply for “membership continuance” with FINRA. This typically entails the following:  

• The firm must file a membership continuance (or MC-400) application with FINRA and agree to a “heightened supervision plan” (HSP) relating to the violations that resulted in the disqualification. 
• Under the Exchange Act, FINRA must file a notice with the SEC regarding its intention to allow the firm to remain a member.
• To address the collateral consequences for the firm’s membership in other SROs, FINRA generally submits a single notice filing to the SEC on behalf of FINRA and the other SROs that includes the HSP. Thus, in reviewing the membership continuance application, FINRA consults with other relevant SROs to confirm their agreement with allowing the firm to continue its membership in the SRO. 
• The SEC reviews the filing and must provide a written acknowledgment before the membership continuance can become effective. 
• FINRA must subsequently examine the firm’s controls and compliance with the HSP. 

Starting in 2022, FINRA took special steps to facilitate processing the unusual nature and number of incoming membership continuance applications related to these OCC settlements. (Other than the OCC settlements, in the last eight years FINRA typically processed fewer than five applications per year on matters that, like these, involved SEC settlements with ordered undertakings.) These steps included developing a standardized HSP template, in consultation with some early-settling member firms, to promote consistency, equal treatment across firms, and clarity regarding the provisions that would be required and examined for; setting a time limit on the duration of the HSPs (in other matters, HSPs are typically of unlimited duration); and reducing the number of FINRA follow-up exams typically undertaken to review for compliance with these HSPs.

January 2025 Settlements

In January, the SEC settled additional enforcement actions with several member firms relating to similar violations of SEC recordkeeping requirements in connection with OCCs. These settlements, however, imposed different and less burdensome undertakings. For example, the undertakings generally do not require the firms to retain an independent consultant or to report to the SEC any disciplinary actions taken against employees. In addition, and most importantly for this discussion, the settlements were structured in a different manner that effectively eliminated the SRO membership collateral consequences. As a result, these firms do not need to: apply for continuing membership with FINRA; establish and comply with an HSP on an ongoing basis; have the approval of their membership continuance with FINRA and other SROs be reviewed by the SEC; or be examined for compliance with an HSP.

Some firms that were subject to the more burdensome pre-2025 settlements recently petitioned the SEC to modify their settlements in a manner that would apply to them the same requirements as the SEC offered to firms that settled in 2025 for substantially similar violations. As noted above, the SEC has declined this request. 

FINRA Next Steps

FINRA has long emphasized the importance of compliance with applicable recordkeeping requirements, including in the context of OCCs, through its own regulatory oversight programs. Nevertheless, the question of how to approach the collateral consequences for SRO membership in this unique situation merits special consideration.  

If the SEC had granted the petition to modify the pre-2025 settlements and put all firms in a similar position, FINRA was prepared to work with the pre-2025 settling firms to terminate their HSPs, since the underlying requirement triggering the need for them would no longer exist. Following the SEC’s decision, for the reasons discussed below, FINRA believes it would be appropriate to modify the existing HSPs for firms that settled pre-2025 with the various SEC undertakings described here. These modifications would focus the HSPs on requiring the firms to complete these undertakings and share with FINRA their certifications to the SEC confirming that they have done so.  

Any changes to these HSPs will not put the pre-2025 settling firms in the same position as firms settling in 2025. FINRA cannot do that because of the differences built into the SEC settlements. In addition, under applicable rules FINRA cannot eliminate the HSPs altogether for the pre-2025 settling firms. 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 HSPs in a manner that would bring the two sets of firms closer in line in terms of their ongoing obligations as SRO members. These include the following:

• The policy considerations associated with reopening the terms of a settled enforcement action are different from those associated with tailoring the related collateral consequences. The SEC itself previously waived other collateral consequences (unrelated to the membership continuation/HSP issue) for pre-2025 settling firms.
• The relevant SEC orders already include several specific, mandatory undertakings by each pre-2025 settling firm that—even without any HSP—obligate the firm to remediate its compliance and supervisory systems. These include:
  • as noted above, retaining an independent compliance consultant to conduct a comprehensive review of the firm’s supervisory, compliance, and other policies regarding electronic communications and to submit a detailed report to the firm and the SEC;
  • adopting the consultant’s recommended changes to policies and procedures;
  • requiring the consultant to assess the firm’s program to preserve electronic communications one year after the consultant submitted its report; and
  • requiring the firm’s internal audit function to conduct a separate audit to assess the firm’s progress in certain areas also covered by the consultant’s review. 
• When the related FINRA rules were adopted, they appear to have contemplated situations where a specific firm’s actions warranted heightened remedial measures on an indefinite basis. As noted above, FINRA normally processes few of these firm statutory disqualification matters in any given year. In contrast, this situation involved 77 firms settling for very similar recordkeeping violations arising from an industry-wide compliance sweep by the SEC. In addition, although this situation is unique, there is some precedent in the context of settlements arising from such an SEC sweep for focusing the HSPs on compliance with SEC undertakings.
• Since FINRA first established the HSP template, it has received significant information regarding the work done by member firms to comply with the SEC undertakings and to address OCC-related risks. This includes conducting examinations of some member firms and reviewing independent consultant reports and the remedial steps being taken. 
• 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, and in conducting any such exams will be informed by the violations identified in the SEC enforcement orders, by the specific independent consultant reports prepared for each firm, by the follow-up assessments of the consultant regarding the firm’s implementation of its recommendations, and by the firm’s internal audit function regarding its progress on the consultant’s recommendations. By modifying the HSPs and leveraging these data points, FINRA will be able to utilize its overall examination resources more efficiently and effectively.
• 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 ongoing SRO requirements. Moreover, the SEC’s determination not to order the undertakings for the 2025 settling firms suggests that it may not be necessary to require the pre-2025 settling firms—which were ordered to comply with undertakings—to comply with additional HSP requirements on top of those undertakings. 
• Another dimension of fairness is raised by the fact that in recent years the SEC also settled enforcement matters for similar OCC violations with numerous non-broker-dealer entities, such as investment advisers, and these entities were not subject to comparable membership continuance application and HSP requirements. 

Accordingly, FINRA staff is working on standardized amendments to these HSPs that would apply to all pre-2025 settling firms consistently. As part of this process, FINRA will consult as necessary with other relevant SROs, as well as with the SEC, which reviewed the existing HSPs as part of the notices FINRA filed with the SEC regarding FINRA’s (and other SROs’) intention to permit the firms to remain members. FINRA will engage directly with impacted member firms regarding changes to their HSPs.

Modernizing the Rules

As noted above, FINRA recognizes the important objectives underlying federal recordkeeping obligations, including enabling a firm and its regulators to ensure the firm and its personnel are complying with a variety of rules.¹ Going forward, however, FINRA also believes it would be useful to engage with member firms and the SEC to consider how these objectives can best be achieved in a world where the relevant technologies and investor behaviors have changed dramatically since the recordkeeping rules were adopted. In Regulatory Notice 25-07, FINRA has solicited comments on rules that affect member firms’ ability to operate a modern workplace using up-to-date business practices and digital technologies. Member firms and others are welcome to offer commentary in response to that Notice.