Finra Increases Scrutiny of Brokers’ WhatsApp Use

Taken from: Original

By: Miriam Rozen


A crackdown on clandestine messaging by traders and dealmakers on Wall Street appears to coincide with a string of WhatsApp enforcement actions in the brokerage industry from the Financial Industry Regulatory Authority.

Finra this year alone has sought sanctions three times–against a brokerage, and two brokers at separate firms–because of alleged misuse of the WhatsApp Messenger platform to communicate with customers in violation of compliance and record-keeping requirements.

In an action this month, Finra censured and imposed a $50,000 fine on InSight Securities, a Highland Park, Illinois dual registered broker-dealer, based on allegations that its brokers had used WhatsApp to send and receive messages that the firm failed to capture or monitor.

Nicholas Iavarone, the Chicago lawyer who defended InSight, described Finra’s investigation of InSight as “the tip of the spear,” meaning he expects the industry self-regulatory organization to pursue other WhatsApp related violations.

“Everybody in the industry is going to find out that there are people using WhatsApp and it’s something that has to be surveilled and monitored,” Iavarone said.

Finra officials did not provide a comment for this story. But Finra’s Annual Examination and Risk Monitoring Program report issued in February stressed the need for firms to monitor “all” digital communications as a way to detect potential outside business activities, selling away or other potential conflicts. The focus on outside activities has been heightened in the era of remote work, compliance officials have said.

The regulator said that the InSight action came to light during an annual audit.

Between 2016 and 2019, around 20 InSight brokers had sent or received 10,000 business-related WhatsApp instant messages which were “were business-related in that they included information about customers’ accounts, investments, or other aspects of the firm’s securities business,” according to Finra’s letter of settlement.

The firm neither admitted nor denied the allegations. Finra “didn’t hit us with a tremendous fine,” because “we didn’t know about it,” Iavarone said about the brokers’ WhatsApp messaging.

InSight has since spent “tens of thousands of dollars” to hire a third-party provider, TeleMessage, to monitor its WhatsApp communications, the lawyer said. TeleMessage is placed on brokers’ cell phones and captures the instant messages, converting them to email and then subjecting them to review by compliance officials, according to InSight.

“The firm believes that this is an isolated incident, which was rectified by the firm nearly three years before this regulator response,” InSight said in its BrokerCheck response.

Also in June, Finra issued a $5,000 fine and 30-day suspension against ex-UBS broker Ramiro L. Colon III based on allegations that he used WhatsApp to communicate with a client without telling the firm.

Colon, a 28-year industry veteran who left the wirehouse in 2021 for ACP Securities in Miami, Florida, “did not have authorization from his member firm to communicate with any customer through the third-party communication application,” and thereby violated Finra’s recordkeeping and “high standards” rules, the regulator said.

A UBS spokesperson did not respond to an emailed request for comment for this story and Colon, who signed a letter of acceptance, waiver, and consent, without admitting or denying the allegations, did not respond to a message sent through LinkedIn.

In March, Finra also issued disciplinary action against a National Securities Corporation broker, which included, among other allegations, that he communicated with clients about securities related matters through unmonitored and uncaptured WhatsApp messages.

An earlier action was settled in February 2020 with a similar $5,000 fine and 30-day suspension against a Boca Raton, Florida-based broker affiliated at the time with Aegis Capital Corp.

Paul A. Falcon sent 894 WhatsApp business-related messages to overseas customers over 17 months from 2017 to 2019, even though the message system was not approved by the firm, according to the agreement letter.

Finra did not report how the Colon or Falcon texts came to light, although it noted that Falcon had previously disclosed he used WhatsApp for business purposes to his firm.

The Finra enforcement actions come amid federal regulators’ broader review of texting.

The Securities and Exchange Commission and Commodities Futures Trading Commission in December 2021 imposed $200 million in regulatory fines on JPMorgan Chase after the bank admitted failing to monitor business-related messages on external channels.

This month, Deutsche Bank’s management board members disclosed they were each taking a nearly $80,000 cut in compensation to accept responsibility for employee use of third-party messaging applications at the lender, according to a report initially in the Financial Times and followed by Reuters.