The Securities and Exchange Commission (SEC) is back in the headlines with a new fine, this time targeting 26 firms for failure to retain business-related texts and chats. The allegation’s seriousness and what this could mean for investors cannot be overstated. Underpinning each fine is a detailed case from one or more companies that brazenly defied the SEC’s regulations, thus inviting potential adverse implications for the broader finance community.
The Seriousness of Allegation and Potential Impact on Investors
Noting the fine’s severity, broker-dealers, investment advisers, and dual registrants were found to have allowed their employees to use off-channel communications, such as texting and chatting platforms, for discussing business matters. Several of these firms, particularly broker-dealers, were known for having extensive record-keeping requirements, which they chose to sidestep in this instance.
Investors need to consider such violation cases as a serious concern for their financial health. By dodging record-keeping safeguards, these companies undermined the transparency that is vital for making informed investing decisions. According to an oft-quoted adage from legendary investor Peter Lynch, "You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets." Similarly, if investors are uninformed due to not having access to full and credible information, their investment strategies may fail.
The list of penalized companies includes several high-profile names, such as:
- Ameriprise Financial Services, LLC, which agreed to a $50 million penalty
- Edward D. Jones & Co., L.P., agreeing to a $50 million penalty
- LPL Financial LLC, also sentenced to a $50 million fine
Despite having policies prohibiting off-channel communications, these firms’ employees frequently broke these rules, earning their companies a charge for failure to supervise.
Advisers and Broker-Dealer Background
At this point, it’s crucial to delve deeper into an examination of the advisors’ backgrounds involved in the recent SEC fine. In the world of financial management, an advisor’s track record often serves as a valuable indicator of future performance.
As an investor, you may have dealings with Ameriprise Financial Services, LLC (FINRA CRD number: 6363), record shows they have a stained past. The company, along with LPL Financial LLC (FINRA CRD number: 6413), and Edward D. Jones & Co., L.P. (FINRA CRD number: 250, has several regulatory violations and has been involved in multiple customer complaints.
Explanation of the FINRA Rule
The legal intricacies involved might seem intimidating, but let’s unravel what this is all about. The foundations of these allegations rest on an important regulation from the Financial Industry Regulatory Authority (FINRA). FINRA Rule 4110, commonly referred to as the “turnover rate”, states that broker-dealers must retain written communication related to their "business as such."
Consequences and Lessons Learned
In the realm of finance, not complying with the law could come with weighty consequences. The fined firms not only faced substantial financial losses, ranging from $400,000 to $50 million, but they were also required to admit to violations of record-keeping and supervisory rules under the Exchange Act and the Advisers Act.
However, there is always something to learn from such incidents. For firms and individuals, the lesson is simple: abide by the rules. The appetite for taking shortcuts could lead your ship towards rough waters. For investors, it serves as a reminder to be vigilant in scrutinizing the professional reputation of the firms and advisors they entrust with their assets.
Mark Twain once said, "A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain." By this, he implied that financial advisors often show their true colors when troubling times arise. The ugly truth is, not all advisors act within the best interests of their clients — in fact, as per the Financial Industry Regulatory Authority (FINRA), there were over 630,000 registered brokers in the U.S. as of 2020, with nearly 2,000 reported instances of misconduct. Stay informed, stay prepared, and remember — a financial advisor’s past sins are often a good predictor of future behavior.
