Reference no: EM133199954

Freedom Investments is also going through its annual FINRA regulatory examination. 

• FINRA is looking closely at Freedom's AML program.
• FINRA is also reviewing Freedom's compliance with the rules and regulations relating to its reporting requirements and its overall operations, including technology and vendor management.
• During its review, FINRA learned that the Firm has hired a third party vendor to handle processing and delivery of confirmations and prospectuses, processing of client disbursements, and other related work.
• In selecting the vendor, Freedom relied upon the good reputation of the vendor and entered into a contract for services.
• However, given the vendor's experience in handling these types of responsibilities, Freedom didn't undertake any additional steps to ensure the vendor was complying with the contract.
• Unbeknownst to Freedom, the vendor experienced a system glitch that resulted in a failure to deliver over 25,000 confirms and prospectuses during a one-year period.
• It turns out that the vendor had upgraded its software to include additional functions, but during the upgrade the vendor inadvertently shut off a feed of transaction related information from Freedom Investments.
• Freedom did not have a report that alerted them to the fact that the feed was not working.

The vendor is also currently investigating a potential data breach by the former girlfriend of an employee of the vendor who handles a number of operational functions on behalf of Freedom Investments. 

• The former girlfriend stole the employee's password and accessed data on Freedom Investments' clients, including account numbers and financial information
• The vendor has recently alerted Freedom Investments to these issues.

Based on the details provided above, please answer the following questions.

1. Is there any required regulatory reporting (the SEC, FINRA or other non- broker-dealer financial regulators) associated with the factual scenario set forth above? If so, please provide the following information for each instance of reporting required:
   1. Regulator requiring reporting and rule (if rule is provided in class materials)
   2. Analysis/Rationale under the rules as to why reporting is required
2. What did the vendor fail to do in connection with its software upgrade process that caused the failure to deliver confirmations and prospectuses?
3. Has Freedom Investments' arrangement with the third-party vendor met the standard of reasonable supervision under FINRA rules? If yes, discuss why?  If no, identify any failures as assessed against a reasonable supervision standard.