Off-Channel Text Messaging Draws FINRA Sanctions

Key Takeaways

• Off-Channel Messaging Remains a Persistent Risk: FINRA continues to scrutinize firms that fail to control business communications on personal devices.
• Written Policies Alone Are Not Enough: Firms must actively monitor and enforce communication rules, not just document them.
• Discovery Failures Can Snowball: Arbitration missteps from years earlier played a significant role in triggering broader enforcement.
• Senior-Level Participation Raises the Stakes: FINRA highlighted that a senior executive engaged in unapproved business texting.
• Late Remediation Has Limits: Improvements made in 2023 did not offset years of earlier supervisory and recordkeeping failures.

Deep Dive

After uncovering years of off-channel communications and discovery failures, the Financial Industry Regulatory Authority has fined Benjamin F. Edwards & Co. $750,000 and issued a formal censure, closing a case that traces back to supervisory gaps first exposed more than five years ago. The settlement centers on the firm’s failure to properly supervise, preserve, and review business-related text messages used by its registered representatives. It also addresses the firm’s failure to meet discovery obligations during a contentious FINRA arbitration tied to recruiting disputes.

Between at least October 2019 and December 2023, FINRA found that Benjamin F. Edwards allowed business-related text messaging to occur largely unchecked, despite having policies on paper that restricted such communications. The firm’s written supervisory procedures generally prohibited business texting unless it occurred through firm-approved software designed to capture and retain messages. In practice, however, FINRA said the firm had no effective system to monitor compliance with those rules or to detect when representatives were using unapproved channels.

As a result, registered representatives, including at least one senior executive, routinely used personal devices and unapproved messaging applications to conduct firm business. FINRA emphasized that this was not a hidden issue. By 2019, the firm had already been sanctioned in arbitration proceedings for discovery failures tied to missing text messages, a development the regulator described as a clear red flag.

Even then, FINRA said the firm failed to take reasonable steps to strengthen supervision or address the risks posed by off-channel communications.

Thousands of Business Texts Went Unpreserved

The supervision gaps were compounded by recordkeeping failures. FINRA found that from October 2019 through December 2023, Benjamin F. Edwards did not preserve all required business-related text messages, as mandated under federal securities laws and FINRA rules.

During that period, at least five registered representatives exchanged a minimum of 3,560 business-related text messages using unapproved applications on personal devices. According to FINRA, those messages were not incidental. They included customer investment directives, the transmission of sensitive personal information, and the provision of investment advice.

While the firm was later able to recover some of those messages during FINRA’s investigation, the regulator said the damage had already been done. The failure to capture and retain communications at the time they occurred placed the firm squarely in violation of recordkeeping requirements.

Arbitration Missteps Kept the Issues Alive

The same communication failures resurfaced during a FINRA arbitration tied to a recruiting dispute that began in 2017. In that case, arbitrators ordered Benjamin F. Edwards to produce electronic communications, including business-related text messages, dating back to before September 2016.

FINRA said the firm failed to fully comply with those orders, even after being compelled to do so. Depositions conducted in 2019 revealed the existence of responsive text messages that had not been produced. Although the firm eventually turned over some materials, it never fully cured the deficiencies, prompting multiple rounds of sanctions from the arbitration panel.

Those discovery failures became a central part of FINRA’s enforcement review and reinforced the regulator’s conclusion that the firm was not meeting its obligations to supervise and preserve business communications.

Fixes Came Late in the Process

FINRA noted that Benjamin F. Edwards did not bring in an external consultant to review its text message supervision until May 2023. Following that review, the firm strengthened its supervisory procedures, expanded training, required periodic certifications, and enhanced its electronic communications monitoring systems by the end of that year.

Those improvements, while acknowledged by FINRA, came years after the underlying conduct began and did not prevent the enforcement action.

Without admitting or denying FINRA’s findings, Benjamin F. Edwards agreed to a censure and a $750,000 fine. The firm also waived any claim that it lacks the ability to pay the penalty.

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