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Regulatory Updates: More FINRA Fines and Suspensions for Unauthorized Text Communications and Electronic Recordkeeping Violations


In September, FINRA fined and suspended another broker for using text messaging to communicate with clients. This is the fourth fine this year that points to a FINRA trend in 2017: Brokers will be fined for using communication tools outside of their firm’s Written Supervisory Procedures (WSPs).

Fines and Suspensions for SMS/Text Messaging

A broker was fined $5,000 and suspended from association with any FINRA member in any capacity for one month. The broker sent 58 text messages relating to his securities business, including messages about investment strategies and specific securities to 16 customers during the course of a year. The findings stated that by doing so, the broker prevented his member firm from supervising those communications, violated the firm’s policy about business correspondence, and contradicted his attestation that he would use his firm’s email system for all business.

Fines for Books and Records Violations

Also in September, two firms were penalized a total of almost $2 million for allegedly failing to maintain their electronic records in a write once, ready many format—also referred to as, WORM—that could not be altered or destroyed. Federal securities laws and FINRA rules require that business-related electronic records be kept in WORM format to prevent alteration. The SEC has stated that these requirements are an essential part of the investor protection function because a firm’s books and records are the, “primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.” 

One firm was censured and fined $1,500,000 for failure to maintain electronic brokerage records in WORM format. The firm failed to maintain some 9.5 million documents and messages related to its brokerage business, including order tickets, trade confirmations, statements, and other transaction-related records from March 2014 to the present. The company also experienced, “audit deficiencies affecting its ability to adequately retain and preserve electronic records,” in violation of the Securities Act. Although the firm’s WSPs contained provisions for storing electronic records in WORM format, it failed to adequately enforce these procedures to ensure that all such records were maintained in the proper format.

The second firm was censured and fined $175,000 and required to conduct a comprehensive review of the adequacy of its relevant policies and procedures. The firm failed to maintain approximately 10 million electronic Broker-Dealer records in WORM format. The firm also failed to keep a duplicate copy of the electronic record, as required by regulation. The firm was previously fined $100,000 for failing to capture, maintain, and preserve all business-related instant messages among registered representatives between 2005 and 2007.

The Regulations

In its 2017 regulatory and examination priorities letter, FINRA announced it will continue to assess firms’ programs to mitigate risks related to electronic recordkeeping, including compliance with WORM requirements by vendor-provided email review and retention services.

The recent fines are a clear indication violations of electronic recordkeeping continue to be FINRA’s top priority. Even if your WSPs prohibit the use of text messaging for business communications, you can no longer assume advisors aren’t using their mobile devices to communicate with clients. An SMS/text messaging prohibition policy is ineffective. The safest approach to comply with the electronic recordkeeping rules and regulation is to implement an “archive everything” strategy. Firms need to be aware of the electronic communications landscape and ensure they archive all business communications sent to and received by their advisors, whether those advisors communicate via email, social media, text messaging, instant messages, or other forms of electronic communication. It’s time to be proactive and get ahead of the curve!

Marianna Shafir Esq.

Marianna Shafir Esq.

Corporate Counsel, Regulatory Advisor at Smarsh
Marianna Shafir is Corporate Counsel and Regulatory Advisor at Smarsh, where she’s responsible for legal and regulatory affairs worldwide. In addition, she helps Smarsh clients navigate compliance obligations, technology trends, and new industry regulations through her vast knowledge of best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco in varying compliance roles.

Marianna is an adjunct professor and lecturer of Law at New York Career Institute, where she teaches Law Office Management and Real Estate Law. She earned her J.D. at Nova Southeastern University, and a B.B.A. degree in marketing from Baruch College.
Marianna Shafir Esq.