The SEC Is Not Done Bringing Enforcement Actions for Off-Channel Communications

By: Pablo J. Man and Lance C. Dial

Following a number of eyebrow-raising settlements with broker-dealers and dual registrants and a standalone investment adviser, on 14 August 2024 the SEC settled charges against 26 broker-dealers, investment advisers, and dual registrants for recordkeeping failures related to off-channel communications. The combined monetary penalties totaled nearly US$393 million, with individual penalties ranging from US$400,000 to US$50 million. The SEC noted that three of the firms (which paid US$5.5 million, US$4.5 million, and US$1.6 million penalties) self-reported their violations and consequently paid “significantly less” than they otherwise would have.

Some key takeaways from these settlements:

1. The SEC was light on detail about the types of communications that are required records, particularly for investment advisers that have more narrow legal obligations under the Advisers Act than brokers do under the Exchange Act. Most of the orders merely note that “investment adviser personnel sent and received off-channel communications that were subject to the record-keeping requirements of Advisers Act Rule 204-2,” without specifying the content of those communications.
2. The orders stress that investment advisers have recordkeeping obligations for communications that are client-facing, counterparty-facing, and/or internal. One of the orders notes that the SEC staff found “pervasive off-channel communications” sent among an adviser’s colleagues as well as to and from the adviser’s clients, counterparties, and other financial industry participants.
3. Certain employees communicated both internally and externally by personal text messages or WhatsApp, which were not approved written communications platforms and were therefore not monitored, subject to firm review, or archived. The use of WhatsApp is notable in particular for non-US firms where WhatsApp is a widespread method of communication.
4. The orders note that firms failed to implement a system of follow-up and review reasonably expected to determine that all personnel, including supervisors, were following recordkeeping policies.

These enforcement actions show the SEC remains focused on ensuring that financial firms have established processes to maintain required records, especially with respect to electronic communication platforms.