On February 9, 2024, the SEC ordered sixteen firms to pay more than a combined $81 million in civil penalties to settle charges for widespread and long-term recordkeeping failures. The SEC’s investigations identified pervasive and long-term use of unapproved communication methods, known as off-channel communications, at all sixteen firms. Generally, off-channel communications occur when employees use their personal devices for business purposes. Employees of the companies charged in these enforcement actions used their personal devices to communicate both internally and externally by text messages. In some instances, employees of the companies charged were using other text messaging platforms such as WhatsApp.
The charges were brought against five broker-dealers, as well as seven dually registered broker-dealers and Registered Investment Advisers (RIAs). In addition, the SEC charged four affiliated investment advisers. The SEC alleged that the firms and their employees failed to maintain and preserve electronic communications. These failures were longstanding and widespread.
The firms admitted the facts alleged in the SEC’s complaints. They acknowledged that their conduct violated the recordkeeping provisions of the federal securities laws. In addition, the firms began making and implementing improvements in their compliance policies and procedures to address these violations.
According to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, “Today’s actions against these 16 firms result from our continuing efforts to ensure that all regulated entities comply with the recordkeeping requirements, which are essential to our ability to monitor and enforce compliance with the federal securities laws.” The SEC has asserted on many occasions that compliance with recordkeeping requirements is essential to investor protection. Recordkeeping also helps to maintain fair, orderly, and efficient markets, as well as facilitating capital formation.
The firms did not maintain or preserve a substantial majority of these off-channel communications. By failing to maintain and preserve required records, some of the firms likely hindered various SEC investigations. These failures involved employees at multiple levels of authority, including supervisors and senior managers.
Aside from paying significant financial penalties, each of the firms was censured and ordered to cease and desist from future recordkeeping violations. The firms also agreed to retain independent compliance consultants to conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices. The independent compliance consultant would also address the firm’s framework for handling non-compliance by employees with those policies and procedures.
The largest penalty was assessed against three firms in Milwaukee, Wisconsin. The SEC discovered their misconduct after it began a risk-based initiative to investigate the use of off-channel and unpreserved communications at broker-dealers. The parties agreed to the sanctions imposed and to pay a $16.5 million penalty.
One dually registered firm paid lower civil penalties than other entities, because it voluntarily self-reported and cooperated with the SEC. Certain employees, even those at senior levels, failed to adhere to the firm’s policies and procedures. Employees communicated, both internally and externally, by personal text messages. After the firm’s compliance staff identified business-related electronic communications on personal devices on a non-approved platform, the compliance deficiencies were reported to the SEC.
The SEC’s press release and the links to these enforcement actions can be found at SEC.gov | Sixteen Firms to Pay More Than $81 Million Combined to Settle Charges for Widespread Recordkeeping Failures.
Months before these enforcement actions, the SEC sent a loud and clear message regarding the importance of avoiding off-channel communications. On August 8, 2023, the SEC charged eleven financial services firms with widespread recordkeeping violations. The firms acknowledged their wrongdoing and agreed to pay combined penalties of $289 million. The SEC alleged that the firms and their employees failed to maintain and preserve electronic communications. Along with other sanctions, the firms were ordered to bolster their policies and procedures in order to prevent future violations.
The SEC uncovered pervasive and longstanding off-channel communications at all eleven firms that were charged. The firms involved in these enforcement actions conceded that their employees often conducted business on their personal devices using various messaging platforms such as iMessage, WhatsApp, and Signal.
The SEC’s enforcement actions are available here.
Takeaways
Based upon the number of enforcement actions brought by the SEC in a relatively short period of time, it is clear that the Commission will focus on recordkeeping during examinations of RIAs. Recordkeeping failures undermine the SEC’s ability to exercise effective regulatory oversight, which may result in harm to investors.
One approach is for RIAs to adopt robust policies and procedures to ensure that Investment Adviser Representatives and other advisory personnel do not use personal devices for business-related communications. If an RIA utilizes that approach, members of the firm should be required to sign an attestation that they will not use off-channel communications for business-related matters. In addition, executives, supervisors, senior leadership and compliance staff must lead by example and should avoid using off-channel communications.
If that approach is not palatable, many electronic communications archiving service providers are available to archive text messages. RIAs that are having difficulty implementing policies and procedures prohibiting electronic messaging on personal devices are strongly encouraged to utilize those services.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 – sales@ria-compliance.com
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