Broker Suspension Over Use of WhatsApp Highlights Strict Consequences of Communication Rule

When brokers communicate with clients, their brokerage firms must monitor their communications to make sure that they are complying with FINRA rules, as well as federal and state securities regulations. When unscrupulous brokers try to dodge their firm’s watchful eyes so that they can engage in nefarious activities, that is a major problem. It also constitutes a violation of FINRA Rule 4511, which mandates that broker-dealers keep six years’ worth of records and communications.

If brokers don’t solely use a company email account to communicate with clients, it makes it very hard for firms to monitor broker-client communications and keep records of those communications, both of which are required by FINRA rules. FINRA Rule 4511 outlines “general archiving requirements,” mandating that brokerage firms maintain accurate books and records and keep those books and records for at least six years. Thus, when brokers use unapproved communication apps or devices to communicate with clients without informing their member firms, this constitutes a violation of FINRA Rule 4511, as well as FINRA Rule 2010, which mandates that brokers maintain “high standards of commercial honor.”

A ThinkAdvisor article published on February 26, 2020 explores the ramifications of brokers violating the FINRA communication rule, which prohibits brokers from using unapproved apps or devices to communicate with clients, and which mandates that broker-dealers supervise all communications between brokers and clients. A broker at Aegis, Paul Falcon disclosed in the firm’s annual personal activity questionnaire that he was using WhatsApp several times a month for business purposes; that day, Mr. Falcon signed the Aegis Telecommunications Policy Acknowledgement, confirming that he would only use company-approved communication devices and would not use text messaging to conduct business with clients. This didn’t stop Paul Falcon from continuing to use WhatsApp to communicate with three overseas customers on his personal cell phone. After FINRA got wind of this, Paul Falcon ultimately consented to a 30-day suspension from the securities industry.

The results of violating FINRA’s communication rule can be harsh, as this case illustrates. Thus, according to a May 31, 2017 article in AdvisorNews that discusses the rules surrounding brokers’ use of social media, brokers should err on the side of caution when engaging in any communications that could be considered business-related.

As businesses have embraced social media as a marketing tool, brokers and brokerage firms should be aware of the special regulations they must follow as members of the securities industry. FINRA Regulatory Notice 17–18 lays out these provisions. In brief:

• The notice reminds firms that business communications made by registered representatives must be “retained, retrievable and supervised.”
• Firms have “adopted” third-party content if they share articles or other media on Facebook or other social networking platforms. Liking or sharing comments also constitutes adopting them
• Regulatory Notice 11–39 mandates that firms not link to any external website that contains misleading information.
• Firms must retain business-related communications that happen over text messaging and chat services (like WhatsApp).
• “Native advertising” (paid marketing content that fits the form of the media format in which it appears, much like an “advertorial”) must be fair, balanced, and not misleading.
• If firms enlist an “influencer” to promote the firm’s brand, products, or services, the communication must be clearly labeled as an advertisement.

If you have questions about brokers’ use of social media or FINRA’s communication rule (Rule 4511), don’t hesitate to contact the securities attorneys of Fitapelli Kurta. Call (877) 238–4175 or email info@fkesq.com for your free case consultation with a securities attorney.