Having completed my Enforcement hearing conducted by Zoom – more about that in an upcoming post – I can finally turn my attention back to some matters that arose while I was busy.
One that stood out for the sheer (and frightening) universality of its lesson is an SEC settlement entered into by Jonestrading Institutional Services, LLC. According to the Order, the firm was fined $100,000 for failing to preserve “business-related text messages sent or received by several of its registered representatives, including senior management.”
What are the details?
- Like lots of firms, Jonestrading’s WSPs flatly forbid its personnel from using text messages for business-related communications. (I mean, that’s the easiest way to avoid the problem with texts, right? Apparently not, as you will see.)
- Late last year, the firm received certain requests for documents from the SEC as part on an enforcement investigation being conducted not about Jonestrading, but, rather, a third party.
- One of the responsive documents referenced the existence of texts between a JonesTrading RR and a firm customer.
- Unfortunately, the firm did not retain those text messages, and so could not produce them to the SEC.
It gets worse.
- Upon further investigation, the SEC determined that it wasn’t just one RR, but “several” RRs.
- These RRs sent each other “business-related text messages.”
- They also exchanged such texts with firm customers and “other third parties.”
Here is my favorite part.
- JonesTrading’s senior management knew that its employees were texting each other and the firm’s customers in text messages.
- In fact, “JonesTrading’s senior management, including compliance personnel, themselves sent and received business-related text messages with others at JonesTrading.”
Ok, hard to argue with the fact that the SEC felt compelled to bring a formal action here. But, you see why I said this case has a frighteningly broad application? Putting aside communications with customers, what firm out there does not, at a minimum, have texts messages among senior management relating to the firm’s “business as such,” a deliberately undefined term (found in SEC Rule 17a-4(b)(4)) designed to cast as wide a net as possible. It is fast, it is easy, it convenient. Texts work. That’s why people use them.
But, that’s not the point. FINRA has been rather clear for years that business-related texts have to be preserved, whether they are internal or whether they are with customers. In Reg Notice 17-18, FINRA stated that
[a]s with social media, every firm that intends to communicate, or permit its associated persons to communicate, with regard to its business through a text messaging app or chat service must first ensure that it can retain records of those communications as required by SEA Rules 17a-3 and 17a-4 and FINRA Rule 4511.
Exactly one year ago, FINRA issued its 2019 Report on Examination Findings and Observations on “Digital Communications.” In that Report, FINRA noted that “some firms encountered challenges complying with supervision and recordkeeping requirements for various digital communications tools, technologies and services” that were specific to text messages: “In some instances, firms prohibited the use of texting, messaging, social media or collaboration applications (e.g., WhatsApp, WeChat, Facebook, Slack or HipChat) for business-related communication with customers, but did not maintain a process to reasonably identify and respond to red flags that registered representatives were using impermissible personal digital channel communications in connection with firm business.” In light of that Report, it was hardly a surprise that shortly after it was released, FINRA included the supervision of text messages as one of its exam priorities in 2020.
The point is, it IS a challenge to keep a handle on text messages, given how ubiquitous they are, how customers increasingly expect to be able to communicate using all sorts of electronic media, not just emails (which are easily captured and preserved), and how people who work together rely on them to conduct day-to-day business. But, just because it’s hard doesn’t mean you get a pass. To the contrary, there are no points allotted for trying, no partial credit. With that said, there is simply no excuse for senior management doing precisely what they undoubtedly train their own RRs not to do. If you are silly enough to be guilty of that, then you better have your checkbook handy to pay the fine.