Landolt Securities has agreed to pay a fine of $25,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA) in a disciplinary decision dated January 16.

Landolt Securities is a dually registered broker-dealer and investment adviser headquartered in Antioch, Illinois, with 13 branch offices and 36 registered representatives.

FINRA says in its order that, from at least March 2021 to the present, Landolt Securities failed to establish, maintain, and enforce a reasonable supervisory system, including written supervisory procedures (WSPs), to supervise the electronic communications of its registered representatives.

Member firms need to ensure supervisors receive appropriate training and possess the necessary skills and licenses to perform these supervisory roles.

As a result, the firm violated FINRA Rule 3110, which requires firms’ WSPs to address the supervision of personnel and provide for the review of a firm’s securities business, correspondence and internal communications, plus customer complaints. (FINRA said the firm also violated Rule 2010, which covers firms’ commitment to uphold high standards of commercial honor and principles of trade.)

FINRA said Landolt Securities’ WSPs for the review of its registered representatives’ electronic communications were not reasonable because they failed to:

• identify the personnel responsible for reviewing emails;
• state how frequently reviews should occur;
• provide reasonable guidance on how to conduct reviews and address issues identified;
• require that reviews be conducted or supervised by a registered principal;
• include any criteria for identifying potentially problematic emails;
• describe what issues or red flags reviewers should be reviewing for; and
• explain whether and how problematic emails should be escalated.

In addition to the fine, Landolt Securities agreed to a censure and to have a member of its senior management who is a registered principal of the firm certify in writing that, as of the date of the certification, the firm has remediated the issues identified in the disciplinary agreement and implemented a supervisory system designed to achieve compliance with FINRA Rule 3110.

FINRA Supervision Rules

FINRA’s supervision rule encompasses many components of member firm procedures that must be designed with investor protection in mind – from WSPs that help the business identify fraudulent trades or transactions to implementing an anti-money-laundering program designed to spot suspicious financial activity.

Beyond those requirements, WSPs must also anticipate how supervisors will review all customer correspondence and internal communications diligently and document these reviews for compliance purposes. To ensure proper oversight, brokers are required to establish how they can communicate with investors through approved firm channels, and how those communications will be preserved.

Member firms need to ensure supervisors receive appropriate training and possess the necessary skills and licenses to perform these supervisory roles.

Having clearly written policies and procedures for the entire supervisory system and the individual steps that need to be followed are important; but monitoring employees and confirming policies are being followed in reality will be the biggest concern for FINRA.

Broker-dealer firms can best attest to their effective supervision under the rule by conducting regular internal inspections and reviews that test these processes and document their functionality in practice.