The Securities and Exchange Commission is facing a lawsuit from a financial industry trade association over its investigation into off-channel messaging, reports ThinkAdvisor.
The American Securities Association (ASA) filed the suit in the U.S. District Court for the Middle District of Florida, alleging that the SEC improperly rejected its request under the Freedom of Information Act for information regarding the enforcement effort.
The SEC launched a probe into the use of unapproved outside messaging apps such as WhatsApp in the financial industry after many employees began working remotely during the pandemic. The investigation included broker-dealers’ compliance on retaining these off-channel communications on personal devices. Firms are required to monitor and save employee communications involving their business and customers. Since late 2021, the crackdown has resulted in civil fines of over $1.7 million.
The ACA claimed that it has filed three requests for information about the SEC’s investigation but that the agency has failed to produce any of the documents requested.
“The purpose of the Freedom of Information Act is to ensure the public has access to information in the possession of federal agencies so the people can hold their government accountable,” ASA president and CEO Chris Iacovella said. “Unfortunately, the SEC has failed to comply with its FOIA obligations, and that is why ASA filed this lawsuit. The American public must have transparency into the SEC’s enforcement process.”
The SEC has filed administrative complaints against dozens of firms, including JPMorgan Chase, Credit Suisse, Wells Fargo, Goldman Sachs and Morgan Stanley, alleging failures in compliance with record-keeping requirements involving employees’ “off-channel” communications. None of the companies have admitted any wrongdoing. In October 2022, the SEC charged 15 broker-dealers and one affiliated investment advisor with widespread recordkeeping violations after finding widespread failures in maintaining and preserving electronic communications. The commission said employees with the firms routinely communicated about business matters through the use of text messaging applications on their personal devices, but the records of those communications were not properly preserved.
In its suit, the ASA contends “there appears to be no rhyme or reason for how the SEC imposed these penalties, and the SEC has provided little explanation into its decision-making.”
The lawsuit seeks to force the SEC to disclose information including any “standards, data, and guidelines” that could show how the agency considered an appropriate penalty amount. It also asked for internal agency emails and memos discussing the record-keeping enforcement action.
The ASA asserts that the SEC ”launched a suspicion-less investigation into whether certain broker-dealers were properly retaining business-related text messages sent and received on personal devices as required by the Commission’s rules,” the lawsuit states.
The SEC declined comment on the lawsuit. Court records indicated the commission told the trade association that releasing requested records would jeopardize ongoing or prospective enforcement actions.
The attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. When it comes to regulatory compliance and enforcement matters, our attorneys have dealt with investigations and enforcement actions stemming from allegations including violations of SEC, FINRA, and SRO rules and regulations. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.
