In a recent enforcement action, a Massachusetts-based investment advisor has been sanctioned by the Financial Industry Regulatory Authority (FINRA) for conducting business communications through an unapproved messaging platform, in violation of recordkeeping rules. The advisor, formerly associated with a major brokerage firm, was found to have used WeChat, a Chinese social media application, to interact with clients without the firm's approval or proper documentation.
Violations and Use of Unapproved Platforms
According to a FINRA letter of acceptance, waiver, and consent issued on September 6, the advisor violated FINRA Rule 4511, which requires firms to maintain copies of all business-related communications. Between December 2018 and August 2021, the advisor used WeChat to engage clients in discussions about investment seminars, structured notes, and other financial products. These communications were not retained as required, and WeChat was not an approved platform for business communication at the firm.
WeChat is a versatile application allowing users to make calls, send messages, and host video conferences, supporting large group chats with hundreds of participants. However, the use of such platforms for business communications presents significant compliance challenges, as they often lack the archival capabilities necessary to meet FINRA's stringent recordkeeping requirements.
Compliance Failures and Misreporting
The advisor's actions were compounded by inaccurate attestations in compliance questionnaires. In 2019 and 2021, the advisor falsely stated that all electronic communications with clients were conducted through the firm's approved email system. This misreporting was particularly concerning, as the firm had explicitly warned the advisor in November 2019 against using unapproved messaging platforms for client communications.
Despite these warnings, the advisor continued to use WeChat for business purposes, leading to a violation of FINRA's rules on recordkeeping and standards of commercial honor. The failure to disclose these communications prevented the firm from maintaining the necessary records, resulting in non-compliance with regulatory obligations.
Penalties and Suspension
The advisor was discharged from the brokerage firm in October 2021 following the discovery of these violations. Without admitting or denying FINRA's findings, the advisor agreed to a 30-day suspension from associating with any FINRA member and a $5,000 fine.
Broader Compliance Concerns
This case underscores the growing scrutiny from regulators over the use of off-channel communications by investment professionals. The use of unapproved messaging platforms, such as WeChat, for business purposes presents significant risks, as firms are unable to meet their recordkeeping obligations when communications are conducted through unmonitored and unarchived channels.
Regulators, including FINRA and the Securities and Exchange Commission (SEC), have ramped up their focus on electronic communication violations in recent years. Earlier this year, a Florida broker-dealer was fined $500,000 by FINRA for failing to preserve business-related text messages. More notably, the SEC recently levied $393 million in fines against over two dozen firms for failing to maintain and preserve records of electronic communications.
The increased regulatory attention on recordkeeping and off-channel communications serves as a reminder to firms and advisors alike of the importance of adhering to approved communication channels and maintaining comprehensive records of all client interactions. Firms must ensure that their compliance policies are clear, up-to-date, and consistently enforced to avoid similar enforcement actions.
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