SEC inquiry targets Edward Jones brokers’ use of messaging apps

Keeping tabs on texts and messaging has been difficult for the industry, and fines have been mounting.

Edward Jones is the latest firm swept up in the SEC’s wide-ranging investigation into communications with clients via unauthorized personal devices.

The firm disclosed the Securities and Exchange Commission inquiry in its annual report filed Friday with the SEC.

“Edward Jones has been responding to requests from the SEC in connection with its publicly reported investigation of compliance by broker-dealers, investment advisers and other financial institutions with recordkeeping requirements,” the firm said in the 10K filing. “The investigation relates to retention of electronic communications stored on personal devices or messaging platforms that have not been approved by Edward Jones for business use by its employees. Edward Jones is cooperating with the SEC’s investigation.”

The disclosure of the investigation comes just after another firm, LPL announced it is facing an SEC inquiry over the same issue. But those firms are far from being the only ones caught up in the probe — the SEC and the Commodity Futures Trading Commission have already leveled more than $2 billion in fines on the issue, according to Bloomberg. Among those that have been dealt penalties are Citigroup, Bank of America, J.P. Morgan, Goldman Sachs, Barclays, Credit Suisse, Deutsche Bank, Morgan Stanley and UBS.

The SEC has fined numerous firms over lapses in email retention for years — but the pandemic and remote work environment appear to have led to more client communications via texts and messaging apps on brokers’ and advisors’ personal devices.

“How the brokers talk to investors and clients is a bedrock principle of SEC regulation. You want to know what they are telling them,” said J. Bradley Bennett, managing director at Seda, an expert witness firm for financial services. “Everyone wants to be accessible on both sides … It’s a trade-off. You want to retain your brokers, and you’ve got to give them the tools they want. On the other hand, you have to spend more money compiling and saving the [communications].”

Because Edward Jones’ decentralized model is different from most broker-dealers — with only one broker per office — the lack of a branch manager means that records retention systems for electronic communications are critical, Bennett said.

“All these systems are very expensive — and they’re overhead,” he said. Moreover, such systems “are prone to errors and glitches” that leave gaps in the records, Bennett said.

“There is a steady drip of these kinds of cases. And the fines suggest that it will continue to be a steady drip, until someone comes up with a better type of technology,” he said.

And while firms may have the best intentions to comply with regulations, the resulting penalties are necessary, Bennett noted. “We have to get significant fines of this kind of stuff, because the cost being noncompliant has to be higher than being compliant.”