IA Settles SEC Charges for Off-Channel Communications Violations
Commentary by Jeff Ziesman
An investment adviser settled SEC charges for failing to comply with recordkeeping requirements on "off-channel" communications.
According to the Order, employees at various levels of the firm, including senior management, used personal devices to communicate via text message about business matters, which included recommendations and advice on securities transactions. The SEC found that these off-channel communications were not retained as required. The SEC noted that the firm's written policies explicitly prohibited such use of personal devices for business communications.
The SEC determined that the firm's actions violated Advisers Act Section 204 ("Reports by investment advisers") and Rule 204-2(a)(7) ("Books and records to be maintained by investment advisers").
To settle the charges, the firm agreed to (i) a cease-and-desist order from future violations, (ii) a censure and (iii) remedial measures, such as firm-wide compliance training. The SEC did not impose a monetary penalty, citing the firm's self-reporting, cooperation and prompt remediation.
Commentary
The SEC brought the first case against a broker-dealer regarding off-channel communications ("OCC") in December 2021. As additional cases were released, the SEC started bringing cases against hybrid entities (both broker-dealers and investment advisers). The SEC brought its first case against a stand-alone investment adviser in April 2024. This matter is the second such case. Similar cases should be expected in the near future.
In this case, the SEC did not impose any financial penalty due to the firm's self-reporting the OCC issues, and the firm's subsequent significant cooperation with the SEC. The SEC cited, as evidence of the firm's significant cooperation, that the firm): (1) self-reported its OCC issues, which were discovered in responding to an SEC subpoena in another matter; (2) voluntarily conducted an internal review to discover the scope of the OCC issues; (3) provided comprehensive training, by outside counsel, to all employees; and (4) significantly assisted the SEC in its investigation of another regulated entity. According to the SEC press release, in past cases the agency significantly reduced the size of the financial penalty, but had always imposed a financial penalty.
It cannot by overlooked that this particular RIA had $1.7 billion in regulatory assets under management. One wonders whether the firm's smaller size, coupled with the assistance provided to the SEC in the other, unrelated, matter, were significant drivers in the decision not to impose a financial penalty. In other SEC OCC cases involving purported credit-for-cooperation, the firms did at least as much as the firm at issue here. However, in those not insignificant matters (i.e., in the millions of dollars), financial penalties were still imposed. In this respect, this case appears to be an outlier.