SEC Enters Into Off-Channel Settlements With Twelve Additional Firms Prior To Leadership Turnover
01/22/2025
On January 13, 2025, one week before Chair Gary Gensler is expected to step down as Chair, the Securities and Exchange Commission (“SEC”) announced settlements with twelve additional regulated entities for alleged recordkeeping failures related to off-channel communications. These settlements resulted in aggregate penalties of $63.1 million and broadly followed the SEC’s well-established precedents in this area, but in what may be a reflection of both how these firms had already implemented many of the SEC’s expected reforms and of how the broader market has internalized the SEC’s guidance since the start of the SEC’s enforcement focus on off-channel communications, certain of the undertakings were lessened.
As with prior settlements, the SEC alleged that the nine investment advisers and three broker-dealers at issue each failed to maintain and preserve electronic communications in violation of recordkeeping provisions of the federal securities laws. Specifically, the SEC alleged that personnel at these firms routinely communicated “off-channel” by using personal devices for business purposes. These communications were frequently text or WhatsApp messages. According to the SEC, at some firms nearly all employees were found to have engaged in off-channel communications at least at some level, and the SEC alleged that all of the firms did not maintain records of the majority of these off-channel communications. The SEC concluded that this conduct was in violation of the Investment Advisers Act of 1940 Rule 204-2(a)(7), which requires registered investment advisors to preserve all records in an easily accessible place, and/or SEC Rule 17(a)-4(b)(4), which requires broker-dealers to do the same.
The SEC settled with one entity that had self-reported its violations for $600,000, whereas the remaining entities were made to pay amounts ranging from $4 million to $12 million. These orders themselves are largely similar to prior off-channel settlements in their description of the recordkeeping requirements as well as the existing policies, procedures and trainings related to the use of these off-channel communication methods for business purposes. However, there are slight differences. Most notably, the settlements do not require the firms to retain independent compliance consultants; conduct one-year reviews; submit written reports to the SEC; or report discipline to the SEC for a two-year period as seen in previous orders. However, each firm must still conduct an internal audit and assessment of instances of non-compliance and must submit a written certification of compliance with their undertakings as well as written evidence of compliance in the form of a narrative which is similar to requirements from earlier orders.
Thus, while these latest settlements reflect a modest shift in the SEC’s approach, there is nothing in the orders actually explaining the change in approach. The shift could be in part due to remediation efforts by the firms or more general market implementation of the reforms the SEC is trying to address though its focus on off-channel communications. Or it alternatively could be reflective of a recognition that the next SEC administration may be less punitive on such issues, especially given prospective-Chair Paul Atkins’ prior criticisms of the SEC’s enforcement actions in this space. Regardless, we expect that, in the coming years, there will be far fewer such actions, and those that are filed may be focused on instances of conscious non-compliance with recordkeeping issues.