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Financial Professionals Texting Clients? SEC Signals Compliance Failures Can Lead to Significant Penalties

Financial Professionals Texting Clients? SEC Signals Compliance Failures Can Lead to Significant Penalties

Oct 06, 2020
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On September 23, 2020, the U.S. Securities and Exchange Commission (“SEC”) entered an Order Instituting Administrative and Cease and Desist Proceedings (“Order”) against a broker-dealer, JonesTrading Institutional Services, LLC (“JonesTrading”), imposing a civil money penalty of $100,000 for failing to preserve business-related communications. Unlike past regulatory settlements though, this matter involved solely text messages relating to the firm’s securities business.  Specifically, the Order against JonesTrading outlined that several registered representatives, including senior management and compliance personnel, sent text messages relating to the firm’s securities business, including texts relating to the size and timing of trades and certain SEC filings.  Per the terms of the Order, JonesTrading neither admitted nor denied the allegations but consented to the entry of the Order and the findings and sanctions therein.   Although the case was brought against a registered broker-dealer, investment advisers should also carefully review the decision, in light of the similarity in book-and-records requirements.

The underlying facts of the JonesTrading Order are relatively straightforward.  The firm had an electronic communications policy that prohibited business-related texts.  JonesTrading relied on annual employee compliance attestations and training to ensure compliance with this policy.  In the course of an Enforcement investigation into a third party, JonesTrading produced certain records identifying the existence of business-related text messages between a registered representative and firm customer.  However, because the firm did not capture and retain business-related text messages, it could not produce the underlying texts to the SEC.

Upon further investigation, the SEC discovered that in 2018 and 2019, certain JonesTrading associated persons exchanged business-related texts with each other, and with firm customers.  In fact, the SEC found that the firm’s senior management (including firm compliance personnel) were implicated in this behavior.  More broadly, senior management knew that certain representatives were communicating with firm customers via text messages.  Nevertheless, neither firm senior management nor firm compliance personnel apparently took affirmative steps to end the activity.

After the SEC alerted the firm to the issue, it did take certain immediate remedial measures.  Specifically, in November 2019, JonesTrading sent all firm personnel an e-mail reminding them of the firm’s prohibition of texting for any business reason, and the regulatory requirements regarding the firm’s need to capture and retain all electronic communications.  Further, the firm provided firm personnel with additional training on business-communication regulatory requirements. 

The Order cited JonesTrading for violations of Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder relating to the failure to retain business-related communication for three years. The Order imposed a civil money penalty of $100,000, and required the firm to cease-and-desist from further violations of Section 17(a) and Rule 17a-41. These are commonly referred to as “books and records” rules.

Firms should consider the following takeaways in light of the recent JonesTrading Order:  First, the Order makes clear that a text communication can, depending on the substance of the communication, be considered a business communication subject to Section 17(a) and Rule 17a-4.  Second, and in a related vein, given the rapid evolution of technology, firms should remain abreast of new tools for communication, and remind employees that it is not the tool or media used for the communication, but rather the substance, that governs whether it is subject to books-and-records requirements.  Third, firm management and compliance personnel are not exempted from either the underlying requirements or the need for training; rather, firms must emphasize that the polices and the regulatory requirements apply to all associated persons of the broker-dealer.  Fourth, once firm management and compliance personnel learn of potentially problematic conduct (i.e., “red flags”) they must take prompt affirmative action to correct it.  Fifth, and finally, the Order serves as an important reminder that regulatory violations can be detected by regulators in unexpected ways, and not necessarily only through a routine examination of the broker-dealer or a branch exam. These added measures promote compliance and mitigate firms’ risk of incurring hefty fines from the SEC and FINRA.

1. The Financial Industry Regulatory Authority (FINRA) may also enforce Section 17(a) and impose its own recordkeeping requirements. See, e.g., FINRA Rule 3110 (requiring each member to make and preserve records in accordance with Rules 17a-3 and 17a-4).

Related Practice Areas

  • White Collar

  • Financial Regulation Compliance & Investigations

  • Securities Litigation and Enforcement

  • Broker-Dealer and Investment Advisor Regulatory Enforcement, Disputes and Investigations

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