ADVISERS AND BROKERS MUST KEEP RECORDS OF WRITTEN COMMUNICATIONS WITH RETAIL CUSTOMERS, INCLUDING COMMUNICATIONS SENT USING PERSONAL ELECTRONIC DEVICES

Picture yourself CCO (Chief Compliance Officer) of ABC Advisory Firm. One of your I.A. representatives makes use of her personal smart phone to stay in contact with clients by texting, as she finds it easier to communicate in writing on her personal phone when she is out of the office. Does the SEC's Rule on Keeping Written Records of Client Communications include such electronic written messages or SMS if they are sent via personal computers, cell phones, et al?

The answer is emphatically yes! The Record Keeping Rule applies, even though the rep or registered associate uses his or her own electronic device or smart phone to send the written communication or message.

The SEC recently brought charges against Scotia Capital and HBSC for widespread record-keeping failures, attributed to permitting associates to send written communications via their personal devices. (See SEC Press Release 2023-91.) Here's what the SEC said in this case:

"The SEC’s investigation of HSBC Securities and Scotia Capital, both registered broker dealers, uncovered pervasive and longstanding use of off-channel communications at both firms. As described in the SEC’s orders, the firms admitted that their employees often communicated “off-channel” about securities business matters on their personal devices, using messaging platforms, such as WhatsApp. Neither firm maintained or preserved the substantial majority of these communications, in violation of the federal securities laws. The failings involved employees at multiple levels of authority, including supervisors and senior executives. Both HSBC Securities and Scotia Capital cooperated with the SEC’s investigation by, among other things, self-reporting the recordkeeping failures after gathering communications from the personal devices of a sample of the firms’ personnel."

Bob Eder in his Study for the Series 6 Exam discusses the dangers of "off-channel communications," using personal phones or other personal devices when communicating with securities clients. Here is a sample:

Violation of SEC Record Keeping Rules via Personal Electronic Devices

It would be a serious violation of SEC Record-Keeping and Supervision Rules for a brokerage or advisory firm to permit its associates to send written correspondence and/or retail communication without first obtaining the written permission of a principal of the firm. This could easily happen where a firm allows its associates to send written messages to customers via personal electronic devices, such as smart phones. This is called "off-channel communications." The firm would not know that the associate has sent written messages, and consequently, there would be no chance for proper supervision.

Here is the link to FINRA's Content Outline for the Series 6 Exam. See the references to Keeping Written Records of Client Communications in FINRA's Content Outline, Section 3.4.

Study for the Series 6 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link for Bob Eder's Study for the Series 6 Exam on Amazon.

See Bob Eder's Author Page on Amazon.com.

For questions about Bob Eder's Study for the Series 6 Exam, or questions in general about the Series 6 Exam, such as Keeping Written Records of Client Communications and Off-Channel Communications, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001.