WhatsApp All Over Again: The SEC Brings More Recordkeeping Charges Against Broker-Dealers and Investment Advisers for Off-Channel Communications
On February 9, 2024, the Securities and Exchange Commission (SEC) announced charges against five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for failures by the firms and their employees to maintain and preserve electronic communications.1 The combined civil penalties were more than $81 million. The firms’ penalties ranged from $8 to 16 million, with one notable exception—one firm received a significantly lower penalty of $1.25 million, which the SEC says reflects the firm’s voluntary self-reporting and cooperation. These represent the latest batch of enforcement settlements related to off-channel communications entered into by the SEC against broker-dealers and advisers, which first began in September 2022.2
According to the SEC, the broker-dealer firms’ employees communicated through personal text messages about the business of their employers, and the investment adviser firms’ employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(b)(4) thereunder (which require broker-dealers to preserve for at least three years originals of all communications received and copies of all communications sent relating to its business as such), with respect to the broker-dealer firms, and Section 204 of and Rule 204-2(a)(7) under the Investment Advisers Act of 1940 (which require registered investment advisers to preserve in an easily accessible place originals of all written communications received and copies of all written communications sent relating to, among other things, any recommendations made or proposed to be made and any advice given or proposed to be given). By failing to maintain and preserve required records, the SEC said that some of the firms likely deprived the SEC of these off-channel communications in various investigations.
The SEC also stated that the firms’ failures involved employees at multiple levels of authority, including supervisors and senior managers. Thus, the SEC also charged the firms with failing to reasonably supervise with a view to preventing and detecting the recordkeeping violations.
In addition to the civil penalties, the firms were ordered to cease and desist the violations and were censured. The firms also 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 found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures.
These administrative proceedings were brought pursuant to the Division of Enforcement’s investigative initiative on this topic, called the Broker-Dealer Off-Channel Communications Initiative, and reflect the SEC’s continued regulatory focus on off-channel electronic communications and firms’ compliance with books & records requirements.
Our Take: It is important to note that in each of these cases, the off-channel communications at issue were conducted on the personal devices of the firm’s employees. In addition to creating recordkeeping and monitoring challenges and related examination risks—as outlined by the SEC in these and prior, similar proceedings—the use of personal devices for firm business raises complicated issues during regulatory investigations when responding to subpoenas and similar requests. These requests, similar to examination requests, are usually drafted quite broadly, and often require the firm to provide requested documents that the firm has the effective ability to obtain, even if the requested document is not in the firm’s immediate possession.
If your firm has not already evaluated its electronic communications policies, procedures and internal controls—which should include, among other things, surveillance, supervisory structure and ongoing reminders to personnel—it should do so sooner than later, as we do not expect this regulatory focus to diminish any time soon. In addition, self-reporting of identified violations should be evaluated and considered, given the potential benefits of doing so, as demonstrated by this group of enforcement actions and those that preceded them.
1 SEC Press Release: Sixteen Firms to Pay More Than $81 Million Combined to Settle Charges for Widespread Recordkeeping Failures (Feb. 9, 2024), available at https://www.sec.gov/news/press-release/2024-18.
2 See SEC Press Release: SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures (Sept. 27, 2022), available at https://www.sec.gov/news/press-release/2022-174. See also SEC Press Release: SEC Charges [Firms] with Widespread Recordkeeping Failures (May 11, 2023), available at https://www.sec.gov/news/press-release/2023-91; SEC Press Release: SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures (Aug. 8, 2023) available at https://www.sec.gov/news/press-release/2023-149; and SEC Press Release: SEC Charges 10 Firms with Widespread Recordkeeping Failures (Sept. 29, 2023) available at https://www.sec.gov/news/press-release/2023-212.
