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The SEC fined JonesTrading, a California-based broker-dealer, $100,000 for wilful violations of the Exchange Act’s books and records requirement as a result of the firm’s failure to preserve copies of business-related text messages. The fine should act as a reminder to all regulated firms to maintain robust processes when it comes to record keeping.
JonesTrading maintained policies and procedures that required business communications to be accessed and transmitted only through firm-sponsored systems. The firm expressly prohibited the use of text messages to conduct business-related correspondence. It relied on annual employee compliance attestations and training to monitor its employees’ adherence to policies and procedures.
However, when the SEC staff requested certain records, JonesTrading produced communication records referencing the existence of text message communications between employees and customers. Upon further investigation the SEC learned several registered representatives of the firm exchanged business-related text messages with each other, with customers, and with other third parties concerning the size of orders and the timing of trades, product offerings, updates on the markets and certain securities prices, and the timing of certain administrative filings with the SEC. JonesTrading did not preserve copies of these text messages in its books and records.
JonesTrading senior management was aware of the text messaging activity and participated in the activity themselves, including compliance personnel.
Learning points from JonesTrading fine
The SEC’s enforcement action was against a registered broker-dealer and didn’t allege any malfeasance. But both the Advisers Act and the Exchange Act contain similar recordkeeping requirements, so the violations by JonesTrading should be noted by all.
The SEC does not prohibit the use of text messaging for business-related purposes. However, the SEC does expect registrants to retain all business-related communications which, as it relates to text messaging, typically requires special retention processes.
Firms should keep these three points in mind to avoid similar issues.
- Have policies and procedures that reflect actual practices within the firm
- Ensure employees understand and adhere to the firm’s policies and procedures related to business-related communications
- Implement systems in place to monitor and, if necessary, record all methods of business-related communications.
How we can help
Bovill offers “hands on” ongoing support whereby an adviser’s compliance practices are reviewed, questioned and refined. We also offer mock examinations designed to identify potential compliance deficiencies prior to the SEC finding them during an examination.
