The Securities and Exchange Commission is expanding its scrutiny of violations involving off-channel communications, according to a Think Advisor report.
To date, the commission has levied over $3 billion in fines as part of its enforcement actions over recordkeeping provisions of the federal securities laws, particularly deficiencies in maintaining and preserving electronic communications. The SEC has penalized major banks and broker-dealers for the use of unapproved communication methods for business purposes, known as off-channel communications.
The commission is now taking a closer look at the actions and involvement of registered investment advisory firms as well, according to two former SEC enforcement attorneys who discussed the issue at the recent Investment Adviser Association’s compliance conference.
Dabney O’Riordan, a partner in Quinn Emanuel’s SEC Enforcement practice, who previously served as the leader of the SEC Enforcement Division’s Asset Management Unit, said that off-channel communications is a “continuing hot topic”, and added, “We’re expecting to continue to see more.”
“We’ve started to see more IAs involved in these orders, which I assume is a precursor to IA stand-alone only cases,” said Adam Aderton, partner at Wilkie Farr in Washington who previously was co-chief of the SEC Enforcement Division’s Asset Management Unit
Last month, the Securities and Exchange Commission fined 16 firms a total over $81 million for widespread recordkeeping failures, including five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers. The firms admitted that some employees communicated through personal text messages about the business of their employers, sending and receiving off-channel communications related to recommendations and advice.
“Today’s actions against these 16 firms result from our continuing efforts to ensure that all regulated entities comply with the recordkeeping requirements, which are essential to our ability to monitor and enforce compliance with the federal securities laws,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
O’Riordan said there remain some questions regarding whether investment advisors are subject the same criteria as broker-dealers. “We have been seeing more dual registrants, more affiliated IAs get charged in the same orders as the broker-dealers.. but really no real answers in the investment advisor space regarding the distinctions between an investment advisor’s recordkeeping requirements versus a broker-dealer’s recordkeeping requirements, he said.
Aderton drew a distinction between different types of behavior cited in the violations, saying that some SEC orders focus on “using ephemeral messaging apps or encouraging junior staff to take conversations off-channel. You can see why the SEC might not like that.”
But he added, “the vast majority of these behaviors we see is not that. It’s just people texting out of convenience or COVID or because texting is the most effective way to get in touch with others on their team.”
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