The Securities and Exchange Commission (SEC) has announced charges against broker-dealers, investment advisers, and dually-registered broker-dealers and investment advisers for failures to maintain and preserve electronic communications. The firms charged have admitted their conduct violated the recordkeeping requirements of federal securities laws, agreed to pay approximately $400 million in combined fines, and begun implementing new compliance policies and procedures. This action follows the more than $1.8 billion in fines that regulators levied against the brokerage units of several top banks.

The SEC investigations uncovered use of unapproved communication methods, also known as off-channel communications. The use of off-channel communications involved personnel at multiple levels of authority, including supervisors and senior managers.  The off-channel communications occurred on platforms such as WhatsApp, iMessage and text messaging.

The firms were each charged with violating certain recordkeeping provisions of the Securities Exchange Act, the Investment Advisers Act, or both. In addition to the financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and was censured.

FINRA Rule 2210 (the “Rule”) governs broker dealers’ communications with the public, including both retail communication and communication with institutional investors. The overall purpose aims to provide cohesive standards for the content, approval, recordkeeping, and filing of communications with FINRA. Generally speaking, broker dealers must comport with Rule 2210 when communicating with the public.

The Rule defines communications as either: (1) retail communication, (2) correspondence, or (3) institutional communication. These categorizations of communication carry key implications, making an understanding of the parameters of each category integral to compliant operations.

          Retail Communication

Rule 2210 defines retail communication as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.” This represents the broadest and most scrutinized category of communication.

          Correspondence

According to the Rule, correspondence means “any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.” Note that this means any communication reaching exactly 25 members constitutes a “correspondence” rather than a “retail communication” making the size of the audience exceedingly vital.

          Institutional Communication

“Any written (including electronic) communication that is distributed or made available only to institutional investors, but does not include a member’s internal communications” constitutes an institutional communication under the Rule. An institutional investor is a non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors often face fewer protective regulations because they are assumed to possess more transactional knowledge and expertise and are deemed better able to protect themselves. As a result, institutional communications receive less scrutiny than retail communications or correspondence.

          Internal Communication

FINRA has further clarified that internal communications are expressly not covered by the Rule, even though previous iterations and interpretations have contemplated their inclusion. “Internal communication” refers exclusively to communications within a firm. If a firm uses material to train or educate registered representatives of other broker-dealers (whether affiliated or unaffiliated), the material would be considered an institutional communication. Regardless, firms still must supervise these internal communications, including those communications used for training or education of registered representatives, to ensure compliance with suitability requirements and general equitable principles of trade. The member firm additionally maintains the duty to ensure that internal training and education materials prove fair and balanced.

The Rule includes both general and specific content standards. As modified in 2013, the Rule maintains the same general content standards in place prior to the revisions, namely that communications “must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.” In light of the SEC’s recent enforcement action, all FINRA members should refamiliarize themselves with the requirements of Rule 2210 and emphasize such requirements to their registered representatives.