October 2, 2023
On September 29, 2023, the SEC charged five broker-dealers, three dual registrants, and two affiliated investment advisors with “widespread and longstanding failures to maintain and preserve electronic communications,” according to the SEC’s press release. The ten firms will pay combined penalties of $79 million. Each firm was also censured and served a cease-and-desist order.
The SEC found that, since at least 2019, employees at these firms engaged in “pervasive and longstanding ‘off-channel’ communications” that their employers, in violation of recordkeeping requirements, largely did not retain.
The firms admitted that their employees sent and received off-channel communications related to business activities, including messages to clients containing recommendations made or proposed to be made and advice given or proposed to be given. The firms failed to retain the majority of these communications, in violation of federal securities laws.
This order marks the SEC’s most recent enforcement in its ongoing sweep targeting recordkeeping violations for off-channel communication. The SEC routinely requests information about registrants’ business communications policies, procedures, and compliance programs in exams, as seen in an exam request list last year. In addition, the SEC brought similar enforcement actions against 16 firms in September 2022, which were charged with violating recordkeeping laws over off-channel business communications. These 16 firms had agreed to pay combined penalties of over $1.1 billion over the violations and to improve their policies and procedures to address the recordkeeping issues, according to the SEC’s press release. The SEC brought enforcement actions against an additional 11 firms last month for similar off-channel communications failures. Those firms incurred fines totaling $289 million.
What does this mean for me?
The SEC’s most recent enforcement action continues to highlight the Commission’s message: firms must comply with recordkeeping requirements; improve internal policies and procedures governing business communications; and self-report any violations.
In the press release for last month’s enforcement, the SEC’s Division of Enforcement Director Gurbir S. Grewal. Grewal said that firms which “self-report, cooperate and remediate” will face “a better outcome.” In this latest round of enforcements we have an example of this “better outcome.” One firm, Perella Weinberg Partners LP, self-reported and received a fine less than one third of the amount of the next closest enforcement. When compared to all of the enforcements in this round, that self-reporting may have saved them anywhere from $5.5 to $32.5 million in additional fines.
If your firm has not reviewed its business communications policies and procedures, now might be the time to assess your firm’s compliance program for any updates needed to effectively oversee, record, and report issues with business communications. Also, be sure to take into account messaging apps along with texting, see our coverage here.
Fairview® provides comprehensive and ongoing compliance services, including comprehensive marketing and advertising review and complete examination support. Contact Fairview Investment Services for additional information about maintaining your compliance program in an ever-changing regulatory environment.