News & Insights

Recordkeeping Failures for Off-Channel Communication Cost 12 Firms $63 Million in SEC Penalties

What happened? 

The Securities and Exchange Commission (“SEC”) announced charges against nine investment advisers and three broker-dealers for failures to maintain records of electronic communications by employees, in violation of federal securities laws. The firms paid penalties ranging from $4 million to $12 million, except for one firm that self-reported its violations and paid the reduced penalty of $600,000. 

At each firm, the SEC uncovered the use of unapproved communications that were not properly retained. Personnel at all levels, including supervisors and senior managers, sent and received off-channel communication that were records required to be retained under the recordkeeping provisions of the Investment Advisers Act or the Securities Exchange Act. Additionally, the firms were charged for failing to reasonably supervise personnel to prevent or detect these violations. 

The Acting Director of the Division of Enforcements, Sanjay Wadhwa, emphasized that the SEC relies on registrants complying with the books and record requirements.  “[T]he consequences go far beyond deficient document productions; such failures implicate the transparency and the integrity of the markets and their participants, like the firms at issue here,” he said in the press release.  

In his remarks at the Securities Enforcement Forum on November 6, 2024, Director Wadhwa referred to the off-channel enforcement initiative as the “WhatsApp initiative” and noted it resulted in charges against more than 100 firms and over $2 billion in penalties. 

Here, as in previous enforcement actions, the size of the firm and the scope and scale of the violations appear to influence the size of the monetary penalty.  The more widespread the behavior within a firm, the more likely a stiff penalty would be recommended by the Division of Enforcement.  

What does this mean for me? 

Charges for recordkeeping failures around off-channel communication have become all too common. Firms have embraced technology to archive written communication via text, apps, and other messaging systems and looked to compliance programs to take efforts to train employees and monitor for this issue. While off-channel communication still presents a difficult challenge to compliance programs, new leadership at the SEC could limit the volume of off-channel investigations. Both SEC Commissioners Hester Pierce and Mark Uyeda have indicated that the current regulatory approach to off-channel communication should be reconsidered. Furthermore, Paul Atkins, the nominee to be the next Chair of the SEC, has advocated for an overhaul of the SEC’s approach to enforcement. 

If you have any questions, or need guidance on how to meet SEC best practices with regards to off-channel communications and record-keeping, let us know. Our SEC compliance experts have extensive experience helping RIAs build and maintain sound compliance programs that meet SEC requirements and industry best practices.