IAs/BDs Settle SEC Charges for Off-Channel Communications Violations
Commentary by Kevin Harnisch and Steven Lofchie
Nine investment advisers and two broker-dealers settled SEC charges for failing to comply with recordkeeping requirements on "off-channel" communications.
The SEC found that the firms "sent and received off-channel communications that, among other things, related to recommendations made or proposed to be made and advice given or proposed to be given in Respondents' advisory businesses." The SEC further found that "Respondents did not maintain or preserve the substantial majority of these written communications." The SEC said "[t]hese recordkeeping failures were firm-wide and involved personnel at various levels of authority."
The SEC also charged the firms with failing to reasonably supervise their personnel regarding these violations.
As a result, the SEC determined that the investment advisers violated Advisers Act Sections 203(e)(6) ("Registration of Investment Advisers") and 204 ("Reports by investment advisers") and Rule 204-2(a)(7) ("Books and records to be maintained by investment advisers"). The SEC determined that the broker-dealers violated Exchange Act Sections 15(b)(4)(E) ("Registration and regulation of brokers and dealers") and 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 agreed to (i) cease and desist from future violations, (ii) censures, (iii) pay combined civil penalties of $63.1 million. The SEC noted that one of the firms self-reported its violations and will pay lower civil penalties than the other firms.
Commentary
Many of the fact patterns in the settlements raise a difficult question—what more could the firms have practically done to prevent certain employees from using off-channel communications? These settlements read like the current Commission's attempt to make this a strict liability offense instead of properly focusing on the overall reasonableness of a firm's control environment.
Commentary
The type of communications that advisers are required to maintain are significantly more limited than the records required of broker-dealers. While broker-dealers are generally required to maintain all records relating to their "business," advisers are only required to maintain communications related to certain specified activities, including, however, the giving of recommendations.