FOLLOW US

A St. Louis-based brokerage firm has agreed to pay a steep penalty after regulators said it failed to police the digital breadcrumbs left by its employees. In a settlement announced Friday, Broker-Dealer Fined $750K headlines the case as Benjamin F. Edwards & Co. Inc. consented to a censure and a $750,000 fine to resolve allegations brought by the Financial Industry Regulatory Authority.

At the heart of the matter: business-related text messages that slipped beyond the firm’s compliance net.

FINRA: Supervisory Gaps Spanned Four Years

According to a letter of acceptance, waiver and consent issued Friday, FINRA alleged that from October 2019 through December 2023, Benjamin Edwards did not reasonably supervise employees’ text messaging or preserve business-related communications sent via text. The regulator said the lapses violated the Securities Exchange Act of 1934 and associated FINRA rules.

The regulator declined to comment Monday. Counsel for Benjamin Edwards did not immediately respond to a request for comment.

FINRA said the case emerged from its review of a January 2022 arbitration award. The firm, the regulator found, lacked any system to monitor compliance with its own written policies that broadly prohibited employees from conducting firm business by text message.

Arbitration Sanctions Raised Red Flags

Discovery Disputes and Missing Messages

The underlying arbitration dates back to 2017 and involved Benjamin Edwards’ recruitment of representatives from another, unnamed firm. During those proceedings, the arbitration panel sanctioned the broker-dealer twice.

The first sanction came after the firm failed to comply with orders to produce communications — including business-related texts. The second followed the late production of some, but not all, of the text messages the panel had required during discovery.

Despite those warning signals, FINRA said the firm did not take adequate corrective steps.

Regulators alleged that five representatives — including at least one senior executive — exchanged more than 3,500 business-related text messages using personal devices. FINRA described the arbitration sanctions as a clear “red flag” that should have triggered stronger compliance measures, yet the firm “failed to take reasonable steps” to meet its recordkeeping obligations.

“These text messages involved, among other things, receiving investment directives and sensitive personal information from customers and giving investment advice to customers,” FINRA wrote in its letter. The regulator added that Benjamin Edwards was ultimately able to retrieve certain messages during FINRA’s investigation.

Compliance Overhaul Amid Industry Crackdown

In May 2023, the firm retained an outside consultant to review its supervision of text messaging practices. It later enhanced its written supervisory procedures, monitoring systems, employee training and internal communications tied to its policies on texting.

The case unfolds against a broader regulatory campaign targeting off-channel communications. In recent years, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission pursued sweeping enforcement actions over the use of platforms such as WhatsApp for business communications. Those efforts resulted in settlements with more than 100 firms and nearly $2 billion in penalties.

Under the Trump administration, SEC Chairman Paul Atkins has said certain prior books-and-records enforcement actions “consumed excessive commission resources not commensurate with any measure of investor harm.”

Legal observers told Law360 that the Biden-era enforcement sweep significantly intensified firms’ focus on communication recordkeeping compliance. Although actions at other agencies have slowed, FINRA continues to advance similar cases.

Benjamin Edwards is represented by Jeff Ziesman of Norton Rose Fulbright. FINRA is represented in-house by Christopher L. Donati.