SEC Fines Adviser for Off-Channel Communications
By: Lance C. Dial and Pablo J. Man
On 3 April 2024 the SEC announced the first off-channel communications settlement with a registered investment adviser who was not otherwise affiliated with a broker-dealer. This settlement provides new insight into how the SEC views adviser’s recordkeeping obligations, which are narrower than broker-dealer regulatory requirements.
The specific messages at issue in the Order are described only as “discussion between and among [the adviser’s] senior officers, managing directors, employees, fund investors, and other financial-industry participants,” and “thousands of text messages related to firm business, including communications concerning recommendations made or proposed to be made and advice given or proposed to be given about securities.”
In reaching the settlement, the SEC takes the position that the failure for the employees to copy their business messages for retention by the firm was a failure to comply with recordkeeping requirements of Rule 204-2(a)(7) under the Advisers Act, which requires advisers to maintain records of (among other things) “recommendation[s] made or proposed to be made and any advice given or proposed to be given; any receipt, disbursement, or delivery of funds or securities; or the placing or execution of any order to purchase or sell any security…” The reference to “thousands” of communications suggests the SEC will look broadly at all communications handled off channel with respect to an adviser’s recordkeeping obligations.
The SEC also notes a deficiency in the firm’s compliance monitoring. Specifically, the SEC notes that, “[d]espite this unapproved use of off-channel communication, [the adviser] did not access employees’ personal devices to determine whether they were complying with the firm’s communication policies.” This suggests that an adviser that uncovers off-channel communications should engage in an affirmative level of surveillance.