Broker Dealers and Private Text Apps – SEC Issues $539 Million in Fines
On August 8, 2023, The Securities and Exchange Commission announced 10 charges against firms and one dually registered broker-dealer and investment adviser for widespread and longstanding failures to maintain and preserve electronic communications.
The firms allegedly acknowledged that their practices violated certain federal securities laws recordkeeping and have agreed to pay combined penalties of $289. The firms and their penalties have been produced and outlined as follows:
- Wells Fargo Securities, LLC together with Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC agreed to pay a $125 million penalty;
- BNP Paribas Securities Corp. and SG Americas Securities, LLC have each agreed to pay penalties of $35 million;
- BMO Capital Markets Corp. and Mizuho Securities USA LLC have each agreed to pay penalties of $25 million;
- Houlihan Lokey Capital, Inc. has agreed to pay a $15 million penalty;
- Moelis & Company LLC and Wedbush Securities Inc. have each agreed to pay penalties of $10 million; and
- SMBC Nikko Securities America, Inc. has agreed to pay a $9 million
According to the SEC, recordkeeping failures such as the offenses committed in his case undermine the ability to exercise effective regulatory oversight. Sanjay Wadhwa, Deputy Director of Enforcement stated, “The 11 firms settling today have acknowledged that their conduct violated the law regarding these crucial requirements.”
Off-Channel Communications
There are specified requirements that brokers and registered investment advisers must adhere to regarding record keeping within firms. The use of personal devices and communication via insecure platforms between brokers and clients is an issue that U.S. regulators have grown increasingly concerned about. This form of communication makes supervision and oversight difficult for regulators.
Off-channel communications, sometimes referred to as off-platform communications, is defined as when members of an organization bound by FINRA and the SEC use an un-approved form of communication to discuss business. This is typically done through text messaging or online messaging services.
This violation is a common occurrence in the securities industry, for example in September 2022, the SEC charged 16 Wall Street firms with recordkeeping failures that ran each organization from $50-125 million each, totaling fines of $1.1 billion. The fines occurred because from January 2018 to September 2021, the firms’ employees routinely communicated about business matters by texting with their personal phones.
The SEC continuously conveys the threats these actions pose to firms and the penalties for partaking in these behaviors. The SEC stated, ??“Make no mistake: If a company or executive misstates or omits information material to securities investors, whether in an earnings call, on social media, or in a press release, we will pursue them for violating the securities laws.”
Off-platform communications pose a significant threat to organizations looking to avoid fines or violate FINRA & SEC rules. There are a lot of critical factors to consider:
- It does not matter if the communications contain any fraud or wrongdoing – Using unapproved platforms for communications is the wrongdoing.
- Guidelines must be enforced regularly– The organization must also demonstrate they continuously reminded employees of this policy, and that reviewing communications was part of supervision.
- Companies must have adequate records of all business communications – If employees are using personal devices that are not monitored by the company, the SEC does not consider this adequate.
- If already fined, you must still act – After a fine, a company must still implement improvements to compliance policies to ensure they meet the requirements of these rules.
It is also outlined that broker-dealers are required to preserve for at least three years originals of all communications received and copies of all communications sent relating to its business.
The Securities Exchange Act of 1934
In this case, each of the broker-dealers was charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to reasonably supervise with a view to preventing and detecting those violations. The SEC act of 1934 was enacted by the United States congress in response to the great depression.
It was essentially created to regulate securities trading and ensure that investors have access to accurate information about the companies they invest in. This act has been instrumental in ensuring that the securities markets are fair, transparent, and accessible to investors of all types. Its prevention strategies have been utilized to assist in fraud and other illegal activities in the securities markets. According to the SEC, 30 enforcement actions and $1.4 billion has been enforced in penalties to drive this foundational message home.
FINRA’s Communication Guidelines
Similar to how the SEC has their rules and regulations to ensure the integrity of the securities markets, the Financial Regulatory Authority (FINRA) also has their own guidelines for brokers to follow.
According to the FINRA Electronic Communication Compliance Rules, it is mandatory for governing businesses that use secure mobile messaging apps like WhatsApp to conduct all business communications with their customers to capture and electronic communications.
FINRA states from its FINRA rule 4511 – Requirements for preservation of books and records that the regulated companies must record business-related electronic records, including text messages, and monitor text messages phone calls. Since the 1990’s, FINRA has been taking disciplinary actions against firms and individuals who refuse to comply with their regulatory standards. Their disciplinary actions include censuring, fining a charge, and suspension of association with any FINRA members. For example:
- In March 2017, FINRA censured and fined TD Securities (USA) LLC $125,000 after finding that they could not conduct reviews or document its reviews of employee emails for more than 13 months. According to their investigations, they used both emails and electronic messaging tools for communications.
- LMBZ Securities, Inc was also convicted and fined in March 2017 $120,000 because it failed to guarantee that the electronic retail communications are according to FINRA content standards. Not only that, but they have also found that the advertorials hosted on their websites and third-party websites were misleading, unwarranted, and exaggerated, violating the FINRA electronic content standards.
FINRA Rule 4511
FINRA rule 4511 requires firms to make and preserve books, accounts, records, and other documents in a way that ensures their accuracy and integrity. This rule is considered extremely important because it ensures that firms are complying with regulations and that investors have access to accurate information about the companies they invest in.
FINRA rule 4511 applies to all member firms of FINRA and requires them to maintain records that are complete and accurate. The rule also requires firms to maintain these records in a way that secures their integrity and in such a way that the records cannot be altered or be destroyed without detection. This is critical to certifying that investors have truthful and valid information and that firms are held accountable for their actions.
In addition to requiring firms to maintain accurate records, FINRA rule 4511 also requires firms to have procedures in place to ensure that their records are properly maintained and that they are in compliance with all the applicable regulations. This includes having systems in place to detect and prevent unauthorized access to records, as well as procedures for the backup and recovery of data in the event of a disaster or other unforeseen event.
Hiring a FINRA Attorney
FINRA arbitration is a process in which an impartial arbitrator or panel of arbitrators is appointed to hear the dispute and render a decision. The White Law Group helps clients navigate the arbitration process and represent their interests throughout the proceedings. This can include preparing and filing the initial claim, conducting discovery, presenting evidence and arguments at the hearing, and appealing the decision if necessary.
If you have an investment related dispute, the securities attorneys at the White Law Group may be able to help you. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases. The firm has offices in Seattle, Washington and Chicago, Illinois and reviews securities cases across the country.
