Summary of the Recent SEC Actions
On August 8, 2023, in yet another set of enforcement actions in the space, the U.S. Securities and Exchange Commission (the “SEC”) settled charges against ten broker-dealers and a dually registered broker-dealer and investment adviser for “widespread and longstanding failures” in maintaining and preserving off-channel communications made by employees that related to each firms’ business activities.1 This is the SEC’s third round (and third year in a row) of bringing multi-million dollar fines against a group of firms for these failures, having levied significant penalties in 2021, 2022, and 2023 with penalties now totaling over $1.5 billion.
Perhaps most importantly, for all firms, when announcing these new matters, the SEC made clear that their work is far from done, stating “we know that other SEC-regulated entities have committed similar violations, and so our work to enforce industry-wide compliance continues”.2
The SEC required each of the charged firms to acknowledge that its conduct violated recordkeeping provisions of the federal securities laws and to implement improvements to their compliance policies and procedures to address these violations. The firms each agreed to retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications on their employee’s personal devices and measures for addressing non-compliance by their employees. Combined, the firms subject to this latest round of SEC enforcement matters paid $289 million in penalties.
In each of the Orders, the firms admitted that from at least 2019 onward, employees frequently utilized various messaging platforms on personal devices, such as iMessage, WhatsApp, and Signal, to communicate information related to or about the business of their employers. The firms were found to have not properly maintained or preserved most of these written communications; further, the failures were found to be systemic, involving employees at all levels of seniority and authority.
The recordkeeping rules adopted under the Exchange Act require that broker-dealers preserve – in an easily accessible place – originals of all communications sent and received relating to the firm’s business. Industry rules further impose supervision requirements that are based on standards the SEC believes a prudent broker-dealer should be following in the normal course of business. The SEC specifically admonished the firm’s supervisors for routinely communicating via off-channel platforms using personal devices. Similarly, while the firm dually registered as an investment adviser was charged by the SEC with violations of the books and records rule under the Exchange Act, instead of the Advisers Act, there appears to be a comparable level of regulatory scrutiny for both broker dealers and investment advisers.
While the SEC noted that it may have uncovered some of the misconduct after commencing a risk-based initiative to investigate the use of off-channel and unpreserved communications at broker-dealers, regulators have made clear that firms – currently or in the future – confronted with these issues would benefit from getting ahead of them where possible. To that end, when announcing the new round of matters the SEC encouraged firms to “self-report, cooperate, and remediate…and you’ll have a better outcome than if you wait for us to come calling”.3
S&K Considerations and Takeaways
In light of the ongoing regulatory scrutiny and the sentiment from enforcement leadership year-over-year in this space, regulated organizations shouldn’t wait for the SEC to examine recordkeeping and supervision practices involving off-channel communications; proactive review is critical. At a minimum, we suggest broker-dealers and investment advisers take the following steps:
- Review the organization’s current electronic communications policies and procedures to assess its adequacy and to identify areas where enhancements may be needed.
- Conduct surveillance of approved communication channels for indications of possible off-channel communications.
- Explore the possibility of engaging vendors with the right expertise to arrive at solutions.
- Train personnel on the implementation and purpose for your policies and procedures, and document such trainings.
- Apply policies and procedures as consistently as possible across all departments and units.
- Adopt a uniform approach to disciplinary measures for employees who violate the policies, regardless of their book of business or seniority.
- Document all remedial actions in real-time when and where possible.
- Consider how to balance conducting both an efficient and thorough approach to investigating potential areas of non-compliance, and determine the most appropriate time and method for reporting to regulators where needed.
The link to the press release and the SEC orders for each Respondent can be found here.
For additional information concerning the SEC’s regulation of off channel communications, please watch this webinar.