A registered broker-dealer has agreed to a settlement after the Securities and Exchange Commission brought proceedings against the firm alleging that it failed to preserve business-related text messages.
The administrative proceedings stem from the failure of JonesTrading Institutional Services LLC of Westlake Village, California to preserve business-related text messages sent or received by several of its registered representatives, including senior management, in violation of Section 17(a) of the Exchange Act and Rule 17a4(b)(4).
Section 17(a) and Rule 17a-4(b)(4) require that brokers-dealers make and keep current various records relating to their business and preserve for three years originals of all communications received and copies of all communications sent relating to their business as such.
Without admitting or denying the SEC’s findings, JonesTrading on Sept. 23 submitted an Offer of Settlement, which the SEC accepted. Under the settlement, JonesTrading agreed to 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.
In fact, this is an issue the SEC warned about in a 2018 Risk Alert, encouraging firms to review their “risks, practices, policies and procedures” regarding electronic messaging and consider possible improvements to their compliance programs. At the time, the SEC noted that it had found that changes in the way mobile and personally owned devices are used for business purposes is posing challenges for advisors and broker-dealers in meeting their obligations under the Books and Records Rule and the Compliance Rule.
Where the Firm Went Astray
The firm, in fact, maintained policies and procedures to ensure it was retaining business-related records, including communications, in compliance with federal securities laws and the commission’s regulations. But where it appeared to go astray was with the text messages.
Among other things, JonesTrading’s electronic communications policy stated that, “Electronic business communications must be accessed and transmitted only through firm sponsored systems,” and further noted that, “Regulators require retention of business communications and firm systems are designed to comply with retention requirements.”
However, the firm’s policies also expressly prohibited its registered representatives from using text messaging to conduct business-related correspondence. The policy stated, “Text messaging is not approved to conduct business related correspondence” and “Home computers or other personal devices and external systems may not be used for business purposes.”
And even though JonesTrading relied on annual employee compliance attestations and trainings to monitor its employees’ adherence to its policies, including the firm’s policy prohibiting the use of unauthorized methods of electronic communication, it later became clear that the policy was not followed.
After the SEC staff in late 2019 requested certain records from JonesTrading in connection with an ongoing enforcement investigation into a third party, the firm produced communication records referencing the existence of text message communications between JonesTrading registered representatives and a firm customer that were responsive to the staff’s request.
But because the text messages were not retained on one of JonesTrading’s firm-sponsored systems, the firm failed to produce the referenced text messages to Commission staff.
Upon further investigation, the Commission staff learned that in 2018 and 2019, several JonesTrading registered representatives exchanged business-related text messages with each other, with JonesTrading customers and with other third parties.
From there, it was determined that the business-related text messages concerned the size of orders and the timing of trades; product offerings; updates on markets and certain securities prices; and the timing of certain administrative filings with the Commission—all of which the firm did not preserve in its books and records.
The SEC also determined that JonesTrading’s senior management knew that the firm’s employees were communicating with each other and the firm’s customers in text messages. In fact, the SEC notes that the firm’s senior management, including compliance personnel themselves, sent and received business-related text messages with others at JonesTrading.
Remedial Measures
JonesTrading did end up taking certain remedial measures after the SEC alerted the firm to this issue, including requiring additional compliance training, reminding all employees via email of their obligations to record and retain all electronic business communications, and reminding that employees are not permitted to communicate via text messaging for business-related communications.
The firm’s email also advised that, for employees interested in using their personal devices for business purposes, JonesTrading would provide a firm-sponsored software solution that preserves text messages sent or received for business purposes on employees’ personal devices.
