What: The SEC announced charges against 26 firms (broker-dealers, investment advisers, and dually-registered broker-dealers and investment advisers) for widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications.
Who: The following firms admitted the facts in their respective orders and agreed to pay combined civil penalties of $392.75 million.
When: The SEC announced the charges on August 14, 2024. The relevant periods for the actions were not uniform among all the affected firms, but in each SEC order, multi-year lookbacks were involved.
Why: Each of the SEC’s investigations uncovered pervasive and longstanding use of unapproved communication methods, known as off-channel communications, at these firms. Across the board, the SEC orders alleged a failure to supervise by the firms, and in certain cases, the firms were also alleged to have potentially compromised and delayed commission matters by failing to maintain and preserve required records related to their businesses. These failures may have deprived the SEC of access to the communications in other investigations.
How: Several firms among the group self-reported, but most of the actions arose from the SEC’s parallel initiatives to investigate off-channel and unpreserved communications at broker-dealers and investment advisers, respectively. Additionally, in a couple of instances, the off-channel issue followed a separate examination or investigation. The offending communication channels included appearances from the usual crowd: text messages, mobile device messaging applications, and social media.
The SEC appears to have taken a particular focus on those in leadership and supervisory roles, and the firms generally cooperated with the SEC’s investigations by gathering and reviewing communications from personal devices, including in several instances those of senior leaders.
Why it matters: This newest round of enforcement actions demonstrates that the issue of off-channel and unpreserved communications is alive and well and that the SEC continues to be willing to impose substantial monetary penalties to change behavior. What is also evident from these orders is that the real issue for firms is not the presence of appropriately prohibitive policies or attestations. Nor is it solely about the deployment of technology solutions. Close to half of the SEC orders recounted that the penalized firm(s) had already implemented systems or devices to allow employees to communicate in an expanded on-channel method, such as corporate phones or using approved messaging applications. Nevertheless, the SEC generally found widespread off-channel communications using personal devices, and the common refrain was that these firms failed to implement a system of follow-up and review reasonably expected to determine that personnel were following the firm’s policies.
With the accumulation of SEC enforcement actions and penalties, it is becoming a financial imperative for compliance programs at both broker-dealers and investment advisers to move beyond the old model of policy and attestations alone and to embrace ongoing testing and validation of communications and supervisory systems to determine if they are effectively designed and followed.
CRC is a business-focused team of senior compliance consultants and executives who bring a unique tailored approach to help our clients succeed in today’s challenging regulatory and economic environment, enabling and empowering our clients to manage the “cost of compliance” without sacrificing the necessary infrastructure and control environment. Please contact Mitch Avnet to setup an introductory discussion: (646)346-2468 | mavnet@compliance-risk.com
