Regulatory Update

FINRA Increases Scrutiny of Brokers’ Text Messaging For Business

August 19, 2022by Marianna Shafir Esq.

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Misuse of prohibited channels

FINRA suspended a broker for 45 days and issued a fine of $7,500 for using his personal cell phone to communicate with customers. From June 2018 to April 2020, the broker sent business-related texts to two customers without approval or supervision by the firm, according to a settlement finalized earlier this month. The text messages discussed account performance, transactions, and market events, according to the regulator.

FINRA said the broker caused his firm to violate Rule 4511 requiring the preservation of accurate books and records and business-related client communications for a period of at least three years because the texts were not logged. A violation of Rule 4511 also triggered a violation of the regulator’s catch-all Rule 2010, requiring “high standards.”

FINRA fined another broker $27,500 for failure to provide notice to his member firm that he was participating in outside business activity (OBA), and for using a personal text messaging application to communicate with firm customers. Thus, the broker caused the firm to maintain incomplete books and records.

The broker’s communications on the unapproved device and application included text messages related to securities recommendations, account performance, account fees, and market events. In certain of these text messages, the broker obtained personal confidential information from firm customers, such as driver’s license information, dates of birth, and social security numbers. In addition, the broker submitted compliance questionnaires to the firm in which he falsely stated that he did not use personal electronic equipment to conduct firm business.

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A broker used his personal email account to communicate with a customer about securities transactions and used his personal cell phone to text another firm customer about securities transactions. The broker did not forward his emails or text messages to the firm for review or retention.

As a result, the broker caused the firm to maintain incomplete books and records. The finding also found the broker participated in a private securities transaction by facilitating the sale of $250,000 of a security to a customer without providing prior written notice to his member firm. In light of the broker’s financial status, no monetary sanction has been imposed.

A broker refused to appear for on-the-record testimony requested by FINRA during the course of an investigation regarding his potential use of his personal email address to conduct securities business, in violation of his member firm’s WSPs. The broker was barred from FINRA membership.

Marketing violation

A broker was fined $10,000 for drafting and sending retail communications to prospective retail customers that concerned a private placement investment opportunity, without prereview. The broker’s communications contained statements that were misleading.

The findings stated that after sending the communications without firm approval, the broker submitted the content of the communications for approval by the firm. The firm denied approval of the communications and informed the broker that the content of the communications contained several issues, including impermissible promissory statements.

Despite the firm’s denial, the broker sent the communications using the firm’s internal system to additional prospective customers. In order to circumvent the system’s restrictions on unapproved communications, the broker falsely affirmed in the firm’s system that he did not intend to send the campaign to more than 25 recipients. However, the broker sent the additional communications in multiple separate batches to 25 recipients at a time – each time falsely indicating that the messages were intended for no more than 25 recipients.

The additional communications also indicated that the broker’s colleague was the sender, notwithstanding that the broker sent all the emails through the firm’s system. The broker obtained his colleague’s permission to send the emails using the colleague’s name, but the colleague was not aware the broker entered false information into the firm’s system or that the firm had previously denied approval of the proposed content of the communications. As a result, the broker violated FINRA Rule 2010.

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Takeaway: regulators have their eyes on mobile communications

Unauthorized communications by financial advisors have been at the center of a recent regulatory sweep. U.S. regulators dropped $1 billion in fines on some of the largest investment banking institutions for failing to monitor the use of mobile texting apps to conduct business.

While a prohibition policy may have worked in the past, prohibiting communication through text message or on mobile apps is no longer a practical strategy for a thriving financial services organization. A prohibition policy will not save firms from fines if advisers are communicating with clients over those prohibited channels.

Firms should be aware of the security and encryption settings of any communication platform their employees use.

Recommendations for getting ahold of mobile

Firms that want to avoid regulatory enforcement should put the necessary focus on updating mobile policies for compliance. Here are some recommendations for what to consider:

Assess current policies and procedures. Policies should be updated to reflect changes to the firm and regulations. Policies and practices should regularly evolve over time to cover all the new ways that reps are communicating with clients.

Develop employee training programs. Ensure all employees are trained and well-aware of all policy guidelines and permitted communication channels. Obtain regular attestations from employees at the commencement of employment and regularly thereafter. Additionally, firms should ensure policy guidelines and permitted communication channels are clearly communicated to employees.

Partner with an innovative archiving provider. Engage an inclusive archiving vendor to monitor social media posts, emails, texts, web apps, etc. Capture and archive such business communications to ensure compliance with record retention rules.

Taking these steps will help to advance your compliance program and supervisory systems and, ultimately, protect your business. New advancements in archiving technology make this simple and possible, so brokers can easily communicate with customers while remaining in compliance.

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Marianna Shafir Esq.
Smarsh Blog

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