We Read and Organized the SEC’s Off-Channel Communications Administrative Orders for 26 Entities So You Don’t Have To!
If you work for an investment adviser or a broker-dealer and you send work-related texts or emails through your Gmail account or iMessage or WhatsApp or whatever, . . . why do you do that? Your firm told you not to do it! Is it just easier? Maybe.
What the Rules Say
The SEC wants your firm to have all of your business-related communications at hand so they can come in and rummage through them whenever they want. Section 17(a)(1) of the Exchange Act and Rule 17a-4(b)(4) require broker-dealers to keep all of their communications “in an easily accessible place”, and Section 204 of the Advisers Act and Rule 204-2(a)(7) do that for investment advisers. Rule 204-2(a)(7) is more specific on what has to be retained, but the effect is largely the same.
The SEC Does a Sweep
Anyway, if you’re reading this, you surely already know that last week the SEC brought cases against 26 broker-dealers and investment advisers because of what their press release called “widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications.” Most of these cases started in September 2021 with a “risk-based initiative to investigate whether broker-dealers were properly retaining business-related messages sent and received on personal devices.” A similar “initiative” focused on investment advisers followed in October 2022, and almost all of the cases came from these initiatives. One, In re P. Schoenfeld Asset Management, LP, arose from a staff examination. Maybe because of its origins, the language in that order is a little different from the others in some places.
All of the orders include censures and cease-and-desist orders. All of the firms but one is agreeing to internal auditing and to retain a compliance consultant – sometimes described as “independent”, sometimes not – to be sure they’re getting their off-channel communications under control. The one, P. Schoenfeld, had already retained a compliance consultant before the staff’s investigation began and has continued to retain that firm.
We Have Tables for You
The combined penalties amounted to $392.75 million, so a lot of money. On the high side, four firms are paying $50 million each, while one is escaping with a $400,000 penalty, and the rest are in between. You may (1) wonder how the firms ended up on opposite ends of that spectrum, but also (2) not feel like reading through all of those administrative orders. We know how you feel! So we did it for you, and broke down the orders addressing the 26 different firms down into two tables. One addresses the allegations across the 18 orders, and the other focuses on the examples of the different firms’ off-channel communications cited by the SEC. In each table, the paragraph numbers from the corresponding orders are cited so you can track each allegation in the table to the corresponding source material.
Some Noteworthy Parts of the Orders
Here are some things we noticed about the orders:
Self-Reports
The SEC’s senior staff is always encouraging self-reporting, but sometimes struggle to quantify its benefits. Here, at least, you can see the self-reporters on the low end of the penalty scale. Hilltop, Cetera, and Truist all “voluntarily contacted the staff regarding certain off-channel communications” in 2023 or early 2024. They end up with penalties of $1.6 million (3.2% of the harshest $50 million penalty), $4.5 million (9%), and $5.5 million (11%), respectively.
On-Channel Platforms
Five firms provided at least some of its personnel with either corporate devices, a proprietary on-channel platform, or a specific texting tool to handle business-related communications. Those sounded to us like substantial efforts toward compliance that might have been rewarded with lower penalties in the end. They were not necessarily! Of these, again Hilltop did well at $1.6 million, but Piper Sandler is paying a $14 million penalty, and Edward Jones, Raymond James, and LPL Financial all maxed out at $50 million. If you’re going to have such a platform, it seems important that your personnel actually use it.
Haitong International Securities (USA) Inc.
We’re not sure what to make of Haitong. Not all of the allegations related to it are great.
They didn’t self-report.
Their off-channel communications were “pervasive” and “at all seniority levels of Haitong’s broker-dealer.”
[N]early all broker-dealer personnel sampled had engaged in at least some level of off-channel communications.”
And yet they received the lowest penalty, at $400,000. Maybe they’re just too small to sustain a larger one?
SEC Press Release (Aug. 14, 2024)
If you’d like to see the tables, click here:
If you’d like these in editable Microsoft Word form, just write to us at info@cadyeducation.com.