According to FINRA, Peng Zhang was fined $5,000 and suspended for 45 days for causing his member firm to maintain incomplete books and records by using instant messaging and non-firm email accounts to exchange securities-related business communications without providing copies to the firm.
The findings revealed that Zhang used an instant messaging service to communicate regarding securities-related business with another individual associated with the firm and with another firm. In addition, Zhang used his personal email account and another non-firm email account to communicate with the other firm regarding the referral of potential investors to that firm to participate in the IPO of an affiliate of Zhang's firm. In certain of these emails, Zhang attached the potential investors' applications for new accounts at the other firm. Zhang did not retain copies of these instant messages or emails for his firm to preserve.
Federal securities regulations require firms to preserve business-related communications to ensure that regulators can examine business conduct, investigate potential violations, and protect investors. When registered persons use personal devices or accounts for business communications without providing copies to their firms, they cause the firms to maintain incomplete books and records in violation of these requirements.
The use of personal instant messaging services and email accounts for business communications is a growing problem in the securities industry. While technology makes it convenient to communicate through various channels, registered persons must understand that all business-related communications—regardless of the platform used—must be preserved in accordance with regulatory requirements. This includes text messages, instant messages, personal emails, and communications through social media or other platforms.
The case is particularly concerning because Zhang was using these communication channels to facilitate participation in an IPO, including sending account applications for potential investors. These are significant business activities that should have been conducted through firm-approved channels subject to supervision and recordkeeping requirements. By using instant messaging and personal email accounts, Zhang deprived his firm of the ability to supervise these activities and maintain required records.
The failure to retain copies for the firm's preservation means that if regulators later sought to investigate these communications or the IPO participation they facilitated, the records would not be available. This undermines regulatory oversight and creates risks that improper activities could go undetected.
The 45-day suspension and $5,000 fine send an important message that registered persons must conduct business through firm-approved communication channels or, if they use other channels, must ensure that records of those communications are provided to the firm for preservation. The case is related to others in the same document involving the same IPO and similar recordkeeping violations, suggesting a broader pattern of inadequate supervision of communications related to this offering.
Investors should understand that firms are required to maintain records of business communications, and these records serve important purposes in protecting investors and enabling regulatory oversight. When registered persons circumvent these requirements by using personal accounts without preserving records, it raises questions about whether they have something to hide and undermines the regulatory framework designed to protect investors.
