Firms Fined for Off-Channel Communications

Twelve firms settled SEC charges for failing to comply with recordkeeping requirements regarding "off-channel" communications.

According to the Orders, the firms' personnel, including senior leadership, used personal devices to communicate via text message about business-related matters. The SEC found that these communications were not retained as required under federal securities laws. The SEC noted that while the firms had policies prohibiting the use of unapproved communication methods employees still engaged in these off-channel communications.

The SEC found that the firms violated Exchange Act Section 17(a) ("Records and Reports") and Rule 17a-4(b)(4) ("Records to be preserved by certain exchange members, brokers and dealers").

To settle the charges, the firms admitted the facts set forth in their respective SEC orders. Eleven firms agreed to pay combined civil penalties of $88,225,000 and agreed to implement remedial measures, including enhanced compliance monitoring and employee training. The SEC did not impose a monetary penalty on one firm, citing its self-reporting, cooperation and prompt remediation efforts.

In a joint statement on the Order as to the firm that cooperated, Commissioners Hester M. Peirce and Mark T. Uyeda argued that the SEC's enforcement approach to off-channel communications leaves firms without "an achievable path to compliance." They emphasized that even firms like the one which was not charged with a civil money penalty, and which had worked to address the issue for over 16 years, could still find themselves in the SEC's crosshairs. They stated that despite the firm's efforts, including providing compliant devices, conducting trainings and disciplining employees, the firm was still found in violation of the recordkeeping requirements because some personnel still used unapproved communication methods. They argued that the SEC's approach equates "reasonableness with perfection," and warned that "firing up our enforcement machinery every couple years" to penalize firms won't make compliance perfect. Commissioners Peirce and Uyeda criticized the SEC's reliance on enforcement, saying, "we cannot enforce our way to compliance." Instead, they called for the Commission to work with the industry to develop a more "pragmatic and privacy-respecting approach" that balances compliance needs with modern communication practices, rather than expecting firms to follow rules written in "simpler times."