Broker Causes Firm to Preserve Inaccurate Books and Records

Jun 14th '22

broker was named a respondent in a FINRA complaint alleging that he willfully violated Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and violated FINRA Rule 2020 by churning a customer’s account.


The complaint alleges that the broker exercised de facto control over the customer’s account by controlling the volume and frequency of trading, deciding what securities to buy and sell, the quantities, the price, and when each transaction would occur. The customer relied on the broker to make securities recommendations and consistently followed those recommendations.


The broker’s trading in the customer’s account was excessive and quantitatively unsuitable, as evidenced by the:


  • Annualized turnover rate of 9.65
  • Cost-to-equity ratio of nearly 74%
  • Size and frequency of the transactions
  • Transaction costs incurred
  • In-and-out trading


This trading generated more than $650,000 in commissions and concessions for the broker and his member firm and more than $770,000 in additional costs that were paid to the underwriters of the offerings. The customer experienced approximately $1,245,000 in losses.


The complaint alleges that the broker did not have a reasonable basis to believe that the transactions and strategy he recommended to the customer were suitable for any customer. The complaint further alleges that the broker falsely characterized transactions in the customer’s account as unsolicited, when, in fact, he solicited the customer to participate in each transaction. As a result, the broker caused his firm to make and preserve false or inaccurate books and records.


In addition, the complaint alleges that the broker made false statements to his firm on an annual compliance questionnaire about how he communicated with the customer. The broker denied communicating via text message with clients when, in fact, he had exchanged text messages with the customer that were nearly all related to the customer’s account.


Recommended Reading: Social Media Capture and Archiving for Financial Services


  • Takeaway: Firms need to implement significant improvements to compliance controls

It is more important than ever that firms ensure their communications are appropriately recorded to prevent recordkeeping violations. Many firms prohibit the use of text messages or personal email accounts, but prohibiting these activities isn’t enough. A prohibition policy will not save firms from fines if their brokers are actually communicating with clients over those prohibited channels. The above enforcement case highlights just one situation in which an employee caused their firm to preserve inaccurate books and records.


Firms must know what their employees are doing. FINRA requires firms to retain records of digital communications that relate to their “business as such” as required by Rule 17a-4(b). If your firm is aware that your brokers are communicating over prohibited channels, you are putting your firm at risk for regulatory violations and fines.


Text messaging is the most in-demand channel that brokers are using to communicate with clients. And the regulators are watching.


To prevent disciplinary action, a safe approach is to implement an “archive everything” strategy to comply with regulatory obligations. Firms need to be aware of the electronic communications environment and ensure they archive all business communications sent to, and received by, their brokers, whether those brokers communicate via email, social media, text messaging, instant messages, or other forms of electronic communication.


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Source: Smarsh

Author: Marianna Shafir Esq. | Regulatory Advisor at Smarsh


About the author:

Marianna Shafir, Regulatory Advisor at Smarsh, is responsible for regulatory affairs worldwide. With her expertise in financial services industry, compliance and e-discovery, Marianna counsels Smarsh clients on meeting regulatory obligations, leveraging technology and guidance on best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco where she was an instrumental member on compliance teams.Marianna has also served as an adjunct professor at New York Career Institute where she taught Law Office Management and Real Estate Law. She earned her Juris Doctorate from Nova Southeastern University. She is a frequent speaker at industry conferences and a contributor to various online publications.


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