SEC CHARGES 10 BROKER/DEALERS/INVESTMENT ADVISERS WITH FAILURE TO KEEP RECORDS OF "OFF-CHANNEL COMMUNICATIONS" WITH CLIENTS

FINRA makes available a Series 6 Content Outline for those planning to sit for the Series 6. This Content Outline describes the subject matter of the Series 6 Exam. The Series 6 Content Outline includes Section 3.4, covering correspondence with clients and mentioning books and records retention requirements.

From time to time, the SEC issues press releases about penalties and charges brought against broker/dealers and advisers. Here is one that imposes penalties on 10 firms for inadequate record-keeping of electronic communications with clients, called "off-channel communications." I include the SEC Release here because it demonstrates that a broker or adviser must treat the rules as having real life consequences, potentially bringing serious penalties and large fines for non-observance.

Bob Eder in his Study for the Series 6 Exam covers correspondence and advertising regulations, with a special emphasis on keeping records, including electronic and off-channel communications, such as those involving clients effected on or through social media.

Students who plan on sitting for the Series 6 Exam should pay careful attention to the following SEC Release as it demonstrates that the SEC and other financial regulators are on the look-out for violators of the record-keeping rules, especially for Off-Channel Communications, and are very likely to ask questions on the Series 6 Exam about these rules.

"SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures

"Firms admit to wrongdoing and agree to pay penalties totaling $289 million

"FOR IMMEDIATE RELEASE
2023-149

"Washington D.C., Aug. 8, 2023 —

The Securities and Exchange Commission today announced charges against 10 firms in their capacity as broker-dealers and one dually registered broker-dealer and investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. The firms admitted the facts set forth in their respective SEC orders. They acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of $289 million as outlined below, and have begun implementing improvements to their compliance policies and procedures to address these violations.

• Wells Fargo Securities, LLC together with Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC agreed to pay a $125 million penalty;
• BNP Paribas Securities Corp. and SG Americas Securities, LLC have each agreed to pay penalties of $35 million;
• BMO Capital Markets Corp. and Mizuho Securities USA LLC have each agreed to pay penalties of $25 million;
• Houlihan Lokey Capital, Inc. has agreed to pay a $15 million penalty;
• Moelis & Company LLC and Wedbush Securities Inc. have each agreed to pay penalties of $10 million; and
• SMBC Nikko Securities America, Inc. has agreed to pay a $9 million penalty. . . . 

The SEC’s investigation uncovered pervasive and longstanding “off-channel” communications at all 11 firms. As described in the SEC’s orders, the firms admitted that from at least 2019, their employees often communicated through various messaging platforms on their personal devices, including iMessage, WhatsApp, and Signal, about the business of their employers. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws. By failing to maintain and preserve required records, certain of the firms likely deprived the Commission of these off-channel communications in various SEC investigations. The failures involved employees at multiple levels of authority, including supervisors and senior executives.

Each of the broker-dealers was charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to reasonably supervise with a view to preventing and detecting those violations. Wedbush Securities Inc., a dually registered broker-dealer and investment adviser, was additionally charged with violating certain recordkeeping provisions of the Investment Advisers Act of 1940 and with failing to reasonably supervise with a view to preventing and detecting those violations.

In addition to the significant financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and was censured. The firms also agreed to retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures."

Here is the link to FINRA's Content Outline for the Series 6 Exam. See the references to Record-Keeping in FINRA's Series 6 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, or about Record-Keeping and/or 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.