SEC Fines Dealer-broker for Not Retaining Business-related Text Messages

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The SEC (Securities and Exchange Commission) issued its first-ever fine related solely to text messaging. The SEC recently settled charges against JonesTrading Institutional Services LLC, a California based registered broker-dealer for failing to record and preserve business-related text messages sent and received by many of its registered representatives on their devices while communicating with each other, with their customers and with others. The messages in question were mainly concerned with, among other things, the size or orders, the timing of trades and the pricing of certain securities.

SEC infographic

Failure to capture text messages by JonesTrading

JonesTrading had prohibited its employees from using text messages from personal devices for business communication. Employees of financial firms generally attest annually to such compliance policies. Investigations revealed that the company violated record-keeping provisions of Section 17(a) of the Securities Exchanges Act and Rule 17a-4. JonesTrading agreed to cease and desist from committing or causing any violation of the provisions, to be censured and to pay a civil liability of $100,000.

An interesting fact about the whole issue is that the matter came to light after SEC staff requested JonesTrading to provide records during an unrelated investigation. As the firm had not retained the requested text messages in their systems, it was unable to produce them. On further probing it was found that the firm’s senior management and the compliance team had sent and received text messages for their business communication and hadn’t captured and archived them in their systems, as stipulated by the regulations.

Violation of FINRA regulations

FINRA regulations make it mandatory for firms to capture and retain text messages used for business communication, for both internal communications as well as with customers. In Regulatory Notice 17-18, FINRA had unequivocally maintained that firms must retain records of business communication done through text messaging apps.

In 2019 FINRA had published a report that stated that many firms have prohibited the use of text messaging for business communications with customers but didn’t put systems in place to monitor and respond to red flags of representatives using impermissible personal digital communication in connection with the firm’s business.

Critical to capture and archive text messages

The JonesTrading issue has many lessons for financial firms regarding FINRA regulations and its text messaging compliance requirements. Any text communication depending on the substance of the communication can be considered subject to Section 17(a) and Rule 17a-4. Secondly, on account of the emerging innovation in the domain of communication, firms and their employees must remind themselves that it is not the tools of communication, but the substance of communication that governs whether it is subject to books and records compliance regulations.

Thirdly, management and compliance teams of firms must not be exempt from the need for training in compliance requirements. Rules of text messaging compliance and the requirements to record SMS messages and monitor phone calls are constantly evolving. Hence the training to the employees must also be on par with that evolution. Fourthly, the management and compliance team on learning about probable problematic conduct must take firm, affirmative actions to correct it. And finally, the JonesTrading issue must come as a reminder to firms that compliance violations can get detected by regulatory authorities in unexpected ways and hence a firm must never lower the guard against such violations.

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