The FINRA Rule 2111 (Suitability), and SEC Rule 10b are two of the most historic and most important regulations ever established in the U.S. financial industry. Both of these regulations appeal to the conduct and practices of the broker-dealer with regards to recommending or making trade transactions on behalf of their clients.
However, they also include details which are often overlooked by many, including how brokers that use text messaging and popular messaging apps such as WhatsApp to communicate securities-related information with their clients are affected.
What is FINRA Rule 2111?
Under the Suitability Rule, broker-dealers have an obligation to recommend only specific investments or investments that are suitable for their customers.In general, a customer’s investment profile would include the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance.
The suitability rule has been deemed to be violated when a broker-dealer “recommends” a security that may be suitable for some investors but is unsuitable for a particular customer. A broker-dealer’s use of general, impersonal advertising material, however, does not give rise to suitability obligations.
What is SEC Rule 10b?
Rule 10b of the Securities and Exchange Act of 1934 gives the SEC the power to enact rules against “manipulative and deceptive practices” in securities trading. The Rule includes several more regulations that continually evolve -the first one was created in 1948,and the most recent was enacted in 2000.
- Rule 10b-1–This rule states that SEC rules against fraud apply to transactions of securities that are exempt from registration. For example, a security issued by a state or local government is exempt from registration; however, SEC rules against fraud apply.
- Rule 10b-3– This rule prohibits securities brokers and dealers from directly or indirectly engaging in securities fraud. Along with Rule 10b-5, this is one of the SEC’s most important tools against fraud.
- Rule 10b-5 – This rule prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security.
- Rule 10b-10– Rule 10b-10 requires brokers and dealers to disclose certain information, in writing, to customers before completing a securities transaction. For example, a broker must list the date and time of the transaction, the company name, share price, and number of shares that the customer is buying or selling, and whom the broker is working for.
- Rule 10b-21– This rule prohibits a seller of securities from deceiving buyers as to the date of sale.
In general, these regulations go hand in hand with the Suitability rule to avoid many fraudulent practices by broker-dealers, particularly churning. The SEC defines Churning as an illegal and non-ethical practice wherein a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement. Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence of churning.
How These Regulations Impact Texting Financial Advisors?
Both the concepts of Suitability and Churning permeate many aspects of communications with the public, including communications through text messaging, WhatsApp and the use of social media channels.
As is the case with the traditional communication channels, text messages that relate to any securities transaction must be pre-approved by a registered principal before they can be communicated to the clients.
It is also critically important for financial firms and their associated persons to ensure that they do not immediately pitch products or give any investment recommendations to anyone who just has reached them via a text message or WhatsApp – unless they confirm that the person is an existing client and the advisor has a reasonable basis to believe that the recommendation is suitable for that customer.
The Role of Text Message Archiving in Suitability and Churning Cases
In order to protect themselves from Suitability claims, financial firms and broker-dealers should also ensure that any recommendations they convey through text messages are explained thoroughly and are discussed fully with context. They should not convey claims or statements that are false, misleading or unwarranted.
In the event that an investor files a Suitability or Churning case based on Omission or Misrepresentation, the financial firm must be able to provide a copy of the archived text messages that prove the organization or the broker-dealer has done due diligence prior to making any recommendations or executing any securities transactions on behalf of the investor.
In order to ensure that all the text messages of broker-dealers comply with the Suitability and Churning rule of FINRA and the SEC, broker-dealers and member firms should invest in an enterprise mobile messaging solution that will allow them to supervise and record mobile SMS, capture voice calls, archive WhatsApp chats, and other business communications more efficiently.
The TeleMessage Mobile Archiver effectively addresses compliance, regulatory, eDiscovery response requirements and reduces risk across a variety of the financial sector. TeleMessage captures and records mobile content, including SMS, MMS, voice calls, social media, and WhatsApp Chats from corporate or BYOD mobile phones. Messages are securely and reliably retained within TeleMessage servers or forwarded to an archiving data storage vendor of your choice.
Our mobile archiving products securely capture content from mobile carriers and mobile devices for a variety of ownership models (BYOD, CYOD, and employer-issued). With our multiple archiving methods, you can always find the right tools or blend for your text message archiving and voice call recording requirements:
TeleMessage offers cross-carrier and international mobile text and calls archiving for Corporate and BYOD phones. Visit www.telemessage.com to learn more about our enterprise mobile archiver’s capabilities or visit our website today at www.telemessage.com to learn more about our mobile archiving products today.
){kind=link}