FINRA Case Features Broker Fined for WhatsApp Use
FINRA recently highlighted a Florida-based broker who was fined $5,000 and suspended for 30 days for using WhatsApp messenger to conduct securities-related business with customers.
According to FINRA, the broker exchanged a total of 894 WhatsApp communications between November 2017 and June 2019, many of which concerned securities-related business with three different overseas customers. The broker primarily used his personal cell phone to communicate via WhatsApp, but occasionally used his desktop computer at the firm as well. The firm was not able to capture the communications the broker sent and received through WhatsApp.
Failure to Follow Written Supervisory Procedures
The firm’s written supervisory procedures (“WSPs”) dictate that electronic business communications can only be accessed and transmitted through the firm’s sponsored systems so that the firm can review, monitor and audit the communications. The firm’s WSPs further detail that employees can only use firm-issued mobile devices.
FINRA also noted that the broker had disclosed using WhatsApp for business purposes in November 2017 when he completed the personal activity questionnaire for his employer. The broker stated that he used WhatsApp to communicate with overseas customers several times a month on his personal cell phone. That same day, the broker signed a Telecommunication Policy Acknowledgement, confirming that he would use only communication devices the firm issued and approved and that the firm prohibited the use of text messaging to conduct business.
WhatsApp Communications Were Not Captured
FINRA found the broker continued to use WhatsApp for business-related communications with customers during the relevant period. The firm did not approve the broker's use of WhatsApp, nor did it capture the communications sent and received through WhatsApp so that it could maintain and preserve them.
As a result, the broker violated rules FINRA rules 4511 and 2010 (governing standards of commercial honor and principles of trade). FINRA Rule 4511 requires that FINRA members make and preserve books and records for a period of at least six years, and do so in a form and media that comply with SEA Rule 17a-4. The rules apply to all electronic communications such as email, instant messages, collaboration tools, text messages, social media, and messaging platforms like WhatsApp messenger.
Takeaway
Brokers are using mobile messaging to communicate with customers. There are regulations that financial firms and broker-dealers must comply with to avoid penalties and non-compliance charges.
Financial firms must comply with record retention requirements to avoid penalties and reputational damage. FINRA clarified in Regulatory Notice 17-18 that financial firms must retain records of communications related to its business that are made through text messaging apps and chat services such as “WhatsApp.” The notice states “…every firm that intends to communicate or permit its associated persons to communicate, with regard to its business through a text messaging app or chat service, must first ensure that it can retain records of those communications as required by SEA Rules 17a-3 and 17a-4 and FINRA Rule 4511. SEC and FINRA rules require that, for record retention purposes, the content of the communication determines what must be retained.”
The problem with using platforms like WhatsApp is that they present compliance risks to financial firms. They employ an encryption protocol to protect the messages from being intercepted. The same technology has prevented firms from capturing all work-related WhatsApp messages and calls of their employees.
This is an even greater challenge now. As firms have shifted to remote work and employees use various messaging applications, compliance concerns inevitably arise. So, while a prohibition policy may have worked before the pandemic — this is no longer a practical strategy for your business. Moreover, FINRA recently released COVID-19 guidance as they expect firms to maintain monitoring requirements of their employees while working from home. Clearly, the regulators are not relaxing the rules during these tough times.
Smarsh prides itself on the breadth and depth of its supported content, and WhatsApp support is here. Today we announced the launch of our capture and archiving solution for WhatsApp and WeChat content. With Smarsh, organizations with compliance, open records and e-discovery requirements will be able to leverage these popular IM tools while being helped to meet their recordkeeping and oversight obligations.
Learn more about Smarsh for WhatsApp and WeChat.
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