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On August 14, the U.S. Securities and Exchange Commission (“SEC”) announced yet another wave of enforcement actions related to widespread “off-channel communications,” charging an additional 26 firms with failing to maintain employee communications on personal devices which related to the firms’ business.1 The new settlements add nearly $400 million to the billions in civil penalties that the SEC has collected from more than 50 firms over the last few years for recordkeeping failures related to off-channel communications.2
Background
The SEC announced that 26 financial firms have agreed to pay over $390 million in combined penalties to settle charges related to extensive recordkeeping failures. The bases for the penalties were the firms’ failure to properly maintain and preserve electronic communications, such as texts and emails, on personal devices used by their employees. According to the SEC, this failure impeded the SEC’s ability to conduct investigations and enforce compliance with securities regulations.
The announcement signals the SEC’s continued focus on “off-channel communications” violations, detailed in our previous alerts.3 Over the past few years, the SEC has brought several waves of enforcement actions against registrants for failing to apply the record retention requirements outlined in the Securities Exchange Act of 1934 (“Exchange Act”) Rule 17a-4(b)(4) and Investment Advisers Act of 1940 (“Advisers Act”) Rule 204-2(a)(7) to employee personal devices or other modern communications applications, including iMessage, WhatsApp, and Signal.
The SEC emphasizes that individuals in supervisory roles, such as senior management, partners, or managing directors, exchanged off-channel communications with multiple colleagues, including junior employees under their supervision. The enforcement actions stress that these respondents also failed to reasonably supervise employees with a view to preventing or detecting violation of the recordkeeping requirements and any record retention policies or procedures were not followed or enforced. The SEC further highlights that by failing to maintain and preserve these records, the firms likely deprived the SEC staff of relevant evidence in SEC investigations.
Benefits of Self-Reporting
The SEC again highlighted the fact that 3 of the 26 firms self-reported their violations to the SEC and, as a result, faced lower civil penalties than they would have otherwise. In previous waves of enforcement actions, the SEC also stressed the importance of self-reporting.4 In each instance where a registrant self-reported, however, they have still been required to pay significant penalties and admit to the same liability as other respondents, namely violations of recordkeeping provisions of the Exchange Act and Advisers Act, and failing to reasonably supervise employees as required under the same statutes. They were also required to engage “compliance consultants” to conduct comprehensive reviews of firm policies concerning electronic communications. As a result, it is important for registrants to consult with outside counsel upon the discovery of any recordkeeping issue to consider next steps, options, and potential benefits of self-disclosure.
1The CFTC also announced related enforcement actions against three of these firms, available here, here, and here.
2 See Press Release, U.S. Sec. & Exch. Comm’n, Twenty-Six Firms to Pay more than $390 Million Combined to Settle SEC’s Charges for Widespread Recordkeeping Failures (Aug. 14, 2024) available here.
3 See, e.g., Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures (Aug. 8, 2023) available here (stating that to date, the SEC has “brought 30 enforcement actions and ordered over $1.5 billion in penalties” related to recordkeeping violations); Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges 10 Firms with Widespread Recordkeeping Failures (Sept. 29, 2023), available here (announcing an additional $80 million in penalties related to recordkeeping violations); see also Gurbir S. Grewal, Director of Enforcement, Sec. Exch. Comm’n, Remarks at N. Y. Bar Ass’n Compliance Institute (Oct. 24, 2023) (stating that the SEC’s “ongoing off-channel communications sweep” has resulted in charges against 40 firms and over $1.5 billion in civil penalties).
4 Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures, (Aug. 8, 2023) available here.
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