SEC Fines 16 Firms More Than $81 Million for Off-Channel Communications

Key Points

• Last week, the SEC announced settlements with 16 broker-dealers, dually registered broker-dealers and investment advisers, and affiliated investment advisers in connection with their failures to maintain and preserve electronic “off-channel” communications.
• This announcement reflects the latest in a wave of enforcement actions against financial firms throughout the industry for their employees’ use of “off-channel” communications to conduct business.
• Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, in the settlement press release, again emphasized the importance of voluntary self-reporting and cooperation, highlighting that one of the settling firms received a significantly lower civil monetary penalty as a result.

On February 9, 2024, the U.S. Securities and Exchange Commission (SEC) announced its latest round of settlements associated with “off-channel” communications. As with the previous round of similar settlements in the fall,¹ the settling parties here included five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for these firms’ and their employees’ failure to maintain and preserve certain electronic communications. Each of the 16 firms admitted that their employees communicated firm business through unapproved, personal messaging platforms.

The settling firms admitted that, in failing to properly preserve such communications, their conduct violated recordkeeping provisions of sections 15(B) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and/or sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) and related SEC regulations.

The firms agreed to pay combined civil penalties of $81 million and to implement improvements to their compliance policies and procedures to address these deficiencies. These firms also agreed to retain independent compliance consultants at their own expense to conduct comprehensive reviews of their electronic communications policies and procedures.

The SEC noted that the firms’ recordkeeping failures likely deprived the SEC of relevant “off-channel” communications in various SEC investigations and that the failures involved employees at multiple levels of authority, including supervisors and senior managers.

In the press release announcing the settlement orders, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, drew attention to a firm and its related subsidiaries that self-reported and that agreed to pay a $1.25 million civil penalty. Notably, the other firms, which did not self-report, agreed to pay penalties ranging from $8 million to $16.5 million.²

Takeaways

• First, this latest round of settlements further demonstrates that the SEC continues to take seriously off-channel communications and recordkeeping requirements.³ Taken together with similar settlements in the past, the progression of the types of entities targeted by the SEC is notable: from broker-dealers, to broker-dealers and dually registered broker-dealers and investment advisers, to a group encompassing broker-dealers, dual registrants and broker-dealers’ affiliated registered investment advisers. This round of settlements does not include any standalone registered investment advisers (RIAs), but given the media reports that certain RIAs are responding to requests from the SEC regarding the use of off-channel communications, a resolution with those RIAs could be the likely next step.
• Second, in at least one settlement order, the SEC called out investment advisory personnel sending and receiving off-channel text messages regarding the “placement of various orders to purchase or sell securities.” This reference to a specific provision of the Advisers Act rule relating to required books and records suggests the SEC’s awareness that the statutory regime of the Advisers Act is different, and perhaps more narrow, than that which covers broker-dealers and their “business as such.”
• Third, the SEC noted various forms of remedial efforts in the orders, including firms providing their employees with firm-issued devices or with “on-channel” texting applications⁴ or other firm-approved applications on employees’ personal phones. The SEC appears to be considering any effort by firms to make communications through approved channels more readily available to employees. Moreover, the SEC appears to be looking for firms to take proactive steps that recognize texting and other messaging platforms as part of modern business communications, while also ensuring those communications are properly preserved.
• Finally, in addition to the civil penalties, each of the settling parties agreed to engage an independent compliance consultant, at their own expense, to conduct a review of electronic communication policies and procedures. This appears to be a remedy that the SEC is requiring in settlements in increasing fashion.

^{1 See September 2023 charges against 10 financial firms here. Additional SEC enforcement actions in this space are available here (December 2021 charges against a broker-dealer subsidiary of a bank), here (September 2022 charges against 16 Wall Street firms), here (May 2023 charges against broker-dealer subsidiaries of two banks) and here (August 2023 charges against 11 Wall Street firms).}

^{2 Akin has published prior alerts on the changes in the Department of Justice’s corporate enforcement policy including with respect to self-disclosure. For more on this subject, see here and here.}

^{3 See Akin’s prior alert on these developments here and here.}

^{4 Settlement orders highlighting “on-channel” texting and messaging applications are here, here and here.}