Broker-dealers are required to store and preserve all communications sent and received by their brokers for a period of three years pursuant to Section 17(a) and Rule 17a4 of the Exchange Act.
That requirement includes text messages, as one firm recently learned the hard way. The SEC instituted administrative proceedings against a California firm for failing to preserve business-related text messages sent or received by several of its registered representatives, including senior management.
Without admitting or denying the SEC’s findings, the firm submitted an Offer of Settlement, which the SEC accepted, wherein the firm agreed to a censure, a civil monetary penalty of $100,000, and to cease and desist from committing or causing any violations and any future violations of Section 17(a) and Rule 17a-4.
Firms are encouraged to review their practices and procedures regarding electronic messaging and consider possible improvements to their compliance programs. It is virtually impossible to prevent advisers from texting their clients, but strongly worded, and enforced policies prohibiting the use of text messages for business purposes can prevent violations
Enforcing those policies is the key to avoiding an SEC enforcement action. In this case the brokerage firm had substantial policies prohibiting the use of text messages, but did not enforce those rules, despite management’s knowledge that such communications were being used, and not stored.
Mark Astarita has 30 years of experience representing investors, brokers and issuers in their securities regulatory and litigation matters, including SEC and FINRA proceedings, arbitrations, and due diligence in connection with public and private offerings and investments. For more information call Mark at 212-509-6544 or send an email to firstname.lastname@example.org