FINRA has imposed a $500,000 fine against Florida-based broker-dealer Dawson James Securities and suspended its CEO for one month. The action comes after a failure to preserve and review over 10,900 business-related text messages sent or received by at least 27 associated persons.
The CEO, Robert Dawson Keyser Jr, an industry participant since 1984, was also ordered to pay a $10,000 fine.
The firm primarily sells private and public securities offerings and has 35 registered representatives and three branch offices.
10,900 business-related texts
FINRA said that, starting in August 2011, Dawson James prohibited their employees from texting for business-related communications. The firm lifted the prohibition in December 2017, only to reinstitute it several years later in January 2021. Whether the policy was “on” or “off,” though, the firm never had a system to “preserve or review” any business-related texting, according to the agency.
The firm allegedly failed to capture and retain more than 10,900 business-related texts sent or received by at least 27 employees, including communications about the firm’s net capital computations, consumer complaints and client recommendations.
“The firm’s management knew that associated persons used text messaging for business-related communications, and during the period when the firm prohibited using text messaging for business purposes, Keyser Jr used his firm-issued mobile phone to send and receive approximately 4,400 business-related text messages,” the settlement read.
The settlement arose from a standard review that FINRA examiners conducted of Dawson James.
In the settlement action, FINRA noted that any registered representative who causes his or her member firm to fail to comply with its recordkeeping obligations violates FINRA Rules 4511 and 3110(a) pertaining to the the written procedures that are required to supervise the types of business in which it engages and the activities of its associated persons.
Private placements and due diligence
In addition to the alleged texting lapses, regulators also found the firm’s supervisory systems for due diligence of private placement offerings “deficient in several respects”, according to the settlement. For example, Dawson James’ procedures didn’t address the conflicts raised when its investment bankers conducted due diligence on offerings by issuers with whom they were affiliated.
The procedures also did not address how to review the reasonableness of the due diligence conducted by the firm’s investment bankers or how the investment banking principal should enforce its requirement of documenting these due diligence reviews.
Dawson James agreed to the standard undertakings that FINRA and the SEC have required in electronic communications recordkeeping cases. That is, it agreed to a fine, a censure, and to hire a third-party compliance consultant to analyze their procedures related to retaining and reviewing business-related texts.
The firm also agreed to submit a written implementation report, certified by an officer of Dawson James, attesting to, containing documentation of, and setting forth the details of the business’s implementation of the consultant’s recommendations.
Electronic comms cases
Just last week, the SEC brought charges against the investment advisory firm Senvest Management, fining the company $6.5m for not preserving business-related electronic communications. The SEC said firm employees sent and received thousands of off-channel business-related communications over two years, including discussions between senior officers, managing directors and other employees.
The SEC in particular has been on a multi-year streak of enforcement actions premised on electronic communications recordkeeping lapses in the financial services industry, starting in September 2022 with its actions against 16 firms, meting out fines totaling $1.1 billion. They followed those actions up with charges against HSBC in March 2023 and Wells Fargo and BNP Paribas in August of that year.
This past February, the SEC fined 16 more firms, including Northwestern Mutual and Guggenheim Securities, collecting more than $81m to settle the charges.
In the settlement agreements themselves and related guidance documents, the SEC has noted that these businesses have remediated or begun to fix their compliance programs after being cited, better enforcing the requisite policies and procedures, implementing training and adding or upgrading technology to try to steer clear of similar infractions in the future.
But the securities regulator also continues to stress the importance of these types of cases, noting that the effective preservation of business communications is the basis upon which the SEC can effectuate its investor and marketplace watchdog role.
