On the last business day of its 2023 fiscal year, the
These recent settlements are the latest chapter in the Commission's enforcement of record-keeping requirements against B-Ds and RIAs pertaining to off-channel communications. Enforcement with respect to RIAs is particularly notable since the record-keeping obligations under the Investment Advisers Act are not as comprehensive as the record-keeping obligations that apply to B-Ds. The recent settlements also follow a series of high-profile enforcement actions against major banks and B-Ds in 2021 and 2022 and the Commission's
It is worth noting that, in this context, the
The Impact of Self-Reporting Versus Failing to Self-Report
The eight broker-dealer entities each admitted that their failure to adequately maintain and preserve certain of their employees' off-channel communications violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(b)(4) thereunder. These firms also admitted this conduct violated their obligation to reasonably supervise employees' use of off-channel communications with a view toward preventing and detecting record-keeping violations.
The five RIAs each admitted that their failure to adequately maintain and preserve certain of their employees' off-channel communications violated Section 204 of the Investment Advisers Act of 1940 and Rule 204-2(a)(7) thereunder. In addition, each of the firms also admitted this conduct violated their obligation to reasonably supervise employees' use of off-channel communications with a view toward preventing and detecting recordkeeping violations.
The table below summarizes the penalties paid by the respective firms. Note that the two
Firm(s) | Conduct | Violation(s) | Monetary Fine |
Employees communicated through personal text messages about the business of their employers. | Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) | ||
Employees communicated through personal text messages about the business of their employers. Also, employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. | Section 17(a) of the Exchange Act and Rule 17a-4(b)(4), Section 204 of the Investment Advisers Act of 1940 and Rule 204-2(a)(7) | ||
Employees communicated through personal text messages about the business of their employers. Also, employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. | Section 17(a) of the Exchange Act and Rule 17a-4(b)(4), Section 204 of the Investment Advisers Act of 1940 and Rule 204-2(a)(7) | ||
Employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. | Section 204 of the Investment Advisers Act of 1940 and Rule 204-2(a)(7) | ||
Employees communicated through personal text messages about the business of their employers. | Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) | ||
Employees communicated through personal text messages about the business of their employers. Also, employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. | Section 17(a) of the Exchange Act and Rule 17a-4(b)(4), Section 204 of the Investment Advisers Act of 1940 and Rule 204-2(a)(7) | ||
Employees communicated through personal text messages about the business of their employer (self-reported). | Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) | ||
Perella Weinberg Partners Capital Management LP | Employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given (self-reported). | Section 204 of the Investment Advisers Act of 1940 and Rule 204-2(a)(7) |
The Commission has not been subtle on this front, and the take-aways are clear:
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First, the Commission is likely to continue its risk-based investigation into the use of off-channel and unpreserved communications at B-Ds and RIAs in FY 2024, and likely will continue its aggressive pursuit of any violations it uncovers.
- Second, knowing that off-channel and unpreserved communications are likely to continue to be an enforcement focus for the
SEC , B-Ds and RIAs should undertake to assess whether employees are engaged in off-channel communications outside of the firm in violation of federal securities laws. - Third, with regard to Slack, Teams, and Zoom chats, which might be "company approved" messaging platforms, firms need to ensure they satisfy regulatory record-keeping obligations.
- Fourth, while the full benefits of self-reporting are still up for debate, there is no question that regulated entities that self-report will be treated more leniently than those that do not self-report. To be sure, as alluded to above, there could well be instances where regulated entities may be wise to challenge a particularly broad or expansive application of the "off-channel" communication recordkeeping requirements.
Given the ease and prevalence of off-channel communications, firms that have not already done so should consider conducting a privileged internal investigation to determine whether any record-keeping violations have occurred. If the firm concludes it has failed to adequately prevent against, monitor, and preserve off-channel communications, it would be well-advised to identify and remediate the structural failures that permitted the violation, and at least consider whether self-reporting is in the company's interests. If making the decision to self-report, firms should continue to cooperatively engage with
We will continue to monitor and report on the key enforcement and regulatory developments at the
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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