SEC Initiates Enforcement Action Against Investment Adviser for Use of Personal Text & Message Applications

August 08, 2023


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Enforcement Alert

SEC Enforcement Action Against Investment Adviser Using Personal Text Messaging

The U.S. Securities and Exchange Commission (“SEC”) initiated a cease-and-desist proceeding against an investment adviser firm, Wedbush Securities Inc. (“Wedbush”), related to the use of personal devices to communicate via text messaging and other messaging applications, which were not approved methods of communication, (“Off-Channel Messages”) by Wedbush employees for business purposes in violation of the firm’s policies.  In anticipation of the proceeding, Wedbush offered a settlement which the SEC has accepted.

Background Facts

The following are some of the key background facts as alleged by the SEC.  RIA Compliance Consultants has not verified the accuracy of such allegations.  Please review the actual order for context and additional details.

Policies & Procedures:

  • Wedbush maintained policies and procedures designed to ensure the retention of electronic communications by designating approved communications methods;
  • Wedbush employees were advised that the use of unapproved electronic communications methods, including on their personal devices, was not permitted;
  • Wedbush employees were required to preserve (by forwarding to Compliance) any personal email, chats or text messages sent or received for business purposes by forwarding to Compliance;
  • Messages sent through Wedbush-approved communications methods were monitored and archived; and
  • Messages sent on personal devices were not monitored or archived (unless employee took action to preserve work related message).

Failure to Preserve Records:

  • SEC initiated an investigation whether Wedbush retained business-related messages sent and received on personal devices;
  • Wedbush voluntarily gathered communications from the personal devices of a sampling of senior leadership and uncovered pervasive Off-Channel Messages at all seniority levels;
  • Wedbush’s investment adviser employees sent and received Off-Channel Messages related to providing and recommending investment advice to clients;
  • Wedbush’s supervisory communicated internally and externally via Off-Channel Messages for business purposes; and
  • Wedbush failed to preserve Off-Channel Messages their employees sent and received related to investment adviser businesses.

Failure to Supervise:

  • Wedbush failed to implement a system of follow-up and review to determine that supervisors were reasonably following Wedbush’s policies; and
  • While permitting employees to use personal phones for business communications, Wedbush failed to implement sufficient monitoring to assure that its recordkeeping and communications policies were being followed.

Applicable Statute and/or Rule

This enforcement action is based upon Rule 204(a)(7) under the Investment Advisers Act:

“Every investment adviser registered or required to be registered under section 203 of the Act (15 U.S.C. 80b–3) shall make and keep true, accurate and current the following books and records relating to its investment advisory business…Originals of all written communications received and copies of all written communications sent by such investment adviser relating to … [a]ny recommendation made or proposed to be made and any advice given or proposed to be given….”

See https://www.law.cornell.edu/cfr/text/17/275.204-2.

Violation

The SEC alleges in the cease-and-desist order that Wedbush failed to supervise its employees with a view to preventing or detecting certain of its employees’ aiding and abetting violations of Section 204 of the Investment Advisers Act and Rule 204-2(a)(7).

Fine & Remedial Efforts

Below is a summary of certain aspects of the fine, restitution, and remediation described in the order.

  • Wedbush is required to retain an independent consultant to conduct (i) a comprehensive review of Wedbush’s policies and procedures and training related to electronic communications and preservation of such communication under federal securities laws, and (ii) an assessment of Wedbush’s surveillance program, technology solution, and measures to preserve electronic communications and prevent use of unauthorized communications methods.
  • For two years following the order, Wedbush must notify SEC of any discipline imposed by Wedbush related to a violation of Wedbush’s electronic communication policy.
  • Internal Audit of Wedbush will also conduct a separate assessment of Wedbush’s electronic communications policies and practices reviewed by the independent consultant.
  • Wedbush is required to pay a civil money penalty of $10,000,000.

Key Takeaways

An investment adviser firm cannot turn a blind eye to executives, principals, investment adviser representatives or other employees using non-approved communication platforms like personal text or messaging applications for business use.

An investment adviser firm must regularly remind, train and obtain attestations from its officers, supervisory principals, investment adviser representatives and other supervised person regarding the electronic communications policy of the firm and use of unapproved messaging applications for business purposes.

Unfortunately, this enforcement action does not answer directly the question of whether an investment adviser firm, which allows use of personal devices, will need to install surveillance technology on personal devices of its supervised persons. Depending upon the circumstances and state, the surveillance of messaging applications on personal devices could pose employment and privacy law issues.

Due to challenges of surveillance of personal devices, many investment adviser firms are likely to adopt an approved messaging application that allows for surveillance and archival of business related communication.

RCC Resources

SEC Risk Alert – Electronic Messaging (12/19/2018)

WSP/CoE Section Update – Text Messaging Prohibited

WSP/CoE Section Update – Text Messaging Permitted

Communication – Text Messaging of Clients Permitted – Rep Acknowledgment & Authorization

Disclosure

The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material facts from the proceeding or order.  RIA Compliance Consultants, Inc. has not verified the accuracy of the securities regulator’s order and is not offering any opinion whether the allegations made by the securities regulator in the administrative proceeding referenced above are accurate.  This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above.  For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.

Posted by Bryan Hill
Labels: Enforcement, SEC, text messaging, Uncategorized
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