SEC Fines Broker-Dealers $86 Million For Record-Keeping Failures
Published On: February 13, 2024

The Fines are in Connection with Financial Advisors Using Text Messaging and Other Forms of Direct Communication, like WhatsApp to Communicate with Clients

On February 9, 2024, the United States Securities and Exchange Commission (“SEC”) fined sixteen firms a total of $81 million for “widespread and longstanding failures” by firms and their employees “to maintain and preserve electronic communications.”  The firms admitted the facts alleged by the SEC in each respective firm’s order, acknowledged that their conduct violated record-keeping requirements of the federal securities laws, agreed to pay civil penalties, and agreed to implement improvements to their compliance policies and procedures.

The February 9, 2024 Order comes on the heels of similar set of orders from August 8, 2023 that fined a different set of firms $239 million for record keeping violations, and a September 27, 2022 Order fining various firms $1.1 billion for their widespread record-keeping failures. All of these orders have a common denominator: they all involve unsupervised written communications between financial advisors and their clients, specifically texting.

Why Is Text Messaging With a Client Such a Big Deal to the SEC?

Federal securities laws are really serious about recordkeeping. In fact, the SEC considers compliance with these recordkeeping requirements as “essential to investor protection and the SEC’s efforts to further its mandate of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.” The written communications that are getting these firms in trouble are off-channel text messages between personal cell phones and the use of communications applications like WhatsApp to facilitate these same communications.

In 2024, the reality is, most of us use our personal devices to text or directly message friends, family, co-workers, and even clients or customers. That’s usually fine, but in the context of the federal securities laws, that’s a big problem for broker-dealers and investment adviser firms because under those laws, they must maintain accurate recordkeeping of certain categories of written communications. There are two federal statutes that require broker-dealers like Northwestern Mutual, Morgan Stanley, and LPL Financial to preserve and maintain written communications having to do with broker-dealer or investment advisory business.  The first is found in Section 17(a) of the Securities and exchange Act, and Rule 17a-4(b)(4), along with Section 204 of the Advisers Act and rule 204-2(a)(7) thereunder. Violating these statutes and rules then leads to another obvious violation – failing to supervise under Section 15(b)(4)(E) of the Exchange Act and Section 203(e)(6) of the Adviser’s Act.

SEC Rule 17a-4(b)(4) requires brokerage firms like Merrill Lynch and UBS Financial to preserve in an easily accessible place originals of all communications received and copies of all communications sent relating to the firm’s business. These minimum record keeping requirements are based on standards a prudent broker-dealer should follow in the normal course of business. Adviser’s Act rule 204-2(a)(7) imposes the same requirements on registered investment advisers. The SEC warned these firms in 2001 about the enforceability and application of these correspondence rules. Unless the financial adviser is texting with his client through an application that is being captured and monitored by his firm, then the communications via text or messaging application are violating these rules.

These are not just trivial violations of securities laws and rules, as evidenced by the now almost $2 billion in fines levied by the SEC.  It is a really big deal.  Here’s an all too familiar story we’ve heard from clients:  A financial advisor texts with her client about an investment, like for example, a Non-Traded REIT offered by Silver Star Properties, or a stock pick of some sort. The text messages contains all sorts of bullish comments about these particular securities like “Great deal, you’ll make 2X on this, trust me…” and says nothing about risk or any other material facts related to the recommendations. These recommendations, a few years later, turn into a bust, costing the client $250,000 in losses.  The investor sues the brokerage firm for these losses and alleges that the financial advisor texted her the recommendations to invest in these securities. But those text messages are long gone, because the client changed phones or got a new phone number, or were otherwise lost or deleted.  The financial advisor, for her part, denies texting with the client, and further denies these particular investments were even solicited by her and that the client was the one who wanted to invest in these investments.  Because the written communications were made through a medium that is not captured by the brokerage firm or supervised by the firm (like firm email is), this creates a problem for the investor, who has very legitimate claims if these texts still existed, but may not be able to prove it because the advisor was using an unapproved method of communicating – text messaging.

Record-Keeping Faillures in Connection with Financial Advisors Using Text Messaging

Should I Be Texting with My Financial Advisor or Investment Adviser?

Clients should NOT be texting with their financial advisors. Sure, personal messages, talking about a football game, that is likely fine. It is 2024 and the routine of texting with people in our lives has become so normal and commonplace. But when it comes to investment or financial advice, do not text with your financial adviser.  The scenario above is becoming more and more common and at the end of the day, it adversely impacts the investor. If your financial advisor insists on texting with you about investment related business, you should tell him to stop, tell his branch manager or supervisor, or copy and paste the text threads into an email, and send it to your advisor’s firm-based email address.

Stoltmann Law Offices Regularly Represents Investors in FINRA Arbitration and AAA Arbitration Claims that Involve Text Messages

The attorneys at Stoltmann Law Offices have been representing investors for twenty-five years and have experienced the technological  changes over this time in the brokerage industry. From when order tickets were handwritten slips, to the increased use of email communications, to today with text messaging, our attorneys are schooled in recapturing those communications and building a case around them. If you are an investor who texted with a financial advisor about various recommended investments or strategies, that have resulted in investment losses, please contact Stoltmann Law Offices today for a no-obligation, free consultation about your case at 312-332-4200. Stoltmann Law Offices is a contingency fee firm offering representation to defrauded investors across the country, which means we do not get paid until you do.

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