Another Round of Messaging Fines

The crackdown on employees’ use of off-channel messaging apps continues! The Securities and Exchange Commission just announced settlements with a whopping 26 financial firms for messaging offenses, and those firms will collectively pay more than $390 million in civil penalties — although three firms that self-reported their offenses will pay much less. 

By now we know the basics of this compliance infraction all too well. Financial firms are supposed to preserve copies of all business communications, and when employees use apps such as SnapChat, WhatsApp, and the like to talk shop, those communications cannot be captured and preserved by the firm’s recordkeeping systems. That violates SEC rules promulgated under Section 17(a)(1) of the Exchange Act and Section 204 of the Advisers Act.

The SEC has sanctioned dozens of firms for messaging abuses since it began its crackdown in 2021. The 26 firms nabbed this week are the single biggest batch of targets yet. They range from Ameriprise Financial, Edward Jones, LPL Financial, and Raymond James, all fined $50 million each; down to Haitong International Securities, dinged only $400,000.

“We remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets,” SEC enforcement chief Gurbir Grewal said in a statement. 

OK, but one important detail: the SEC also granted waivers to the 26 offenders busted this week so the firms can keep working on deals as usual, when normally their conduct would disqualify them from doing so. (The SEC had been doing this from the start but had not called attention to that fact until earlier this year.) So while this books-and-records crackdown is likely to continue, so far firms have been able to buy their way out of serious threat to their business operations.

Expanded Enforcement Reach

Another interesting detail is that apparently for the first time (at least, I don’t recall seeing this before), the SEC is now also going after investment advisers and citing violations of the Advisers Act as grounds for enforcement. Until now, the agency has only gone after investment banks and broker-dealer firms, only citing violations of the Exchange Act. 

The enforcement action against Edward Jones is a good example. The firm is both a broker-dealer and a registered investment adviser (not an uncommon arrangement), and paid $50 million as part of this week’s sweep. 

As described in the SEC settlement order, the agency found “pervasive off-channel communications” when SEC staff conducted a review of Edward Jones’ operations in 2022. “Nearly all Edward Jones personnel whose communications were reviewed in the course of the investigation had sent or received off-channel communications that were records required to be preserved,” the SEC said. 

Messaging violations under the Exchange Act have been discussed in prior posts — employees talking shop with their managers, or with colleagues in other firms, for example. This settlement with Edward Jones also describes messaging violations under the Advisers Act. These violations can include communications relating to “an investment adviser’s receipt, disbursement or delivery of funds or securities.” 

In Edward Jones’ case, one financial adviser and colleague exchanged numerous text messages on an unapproved platform regarding the disbursement and delivery of funds to a client. Another financial adviser exchanged multiple text messages on an unapproved platform with clients concerning placing or executing trades in their accounts. #Violation.

At the other end of the scale is P. Schoenfeld Asset Management (PSAM), a registered investment adviser that had roughly $1.5 billion in assets under management at the time of its violations. The SEC settlement order faulted PSAM for widespread recordkeeping failures under the Advisers Act, and the firm agreed to pay a penalty of $1.25 million, among the lowest settlements announced this week. 

So yes, even smaller investment advisory firms are now in frame for the SEC’s messaging crackdown, in addition to the larger broker-dealers who have been in that picture since 2021. Compliance leaders at investment advisers might want to review their training, policies, and procedures now; and if you find violations, remember that voluntary self-disclosure does lead to demonstrably lower penalties. 

All the Usual Compliance Reforms

Another standard settlement term for these offenders has been to hire an “independent compliance consultant” to help the firm overhaul its messaging policies and procedures. 

Once upon a time (that is, when the settlement with JPMorgan started this crackdown in 2021), dissecting the duties of these consultants was a meaty discussion. Since then these engagements have become standard fare for messaging violators, that seems to be the case with this week’s settlements now.

For example, Truist Securities and two affiliates (which altogether paid $5.5 million in penalties because Truist self-reported) also agreed to hire a compliance consultant who will review:

• Truist’s supervisory policies for messaging and electronic communications;
• Employee training on the subject;
• The firm’s surveillance program to monitor employee communications (which may sound creepy to non-bank people, but is standard fare in the financial world);
• The technology that Truist uses to meet its records-retention obligations under SEC rules;
• The disciplinary framework Truist uses to assure that employees are punished appropriately and consistently for violations (including the idea that senior executives who should know better are punished more harshly than junior employees). 

There’s not much more to say on the subject except that the SEC is going to keep at this issue, launching enforcement sweeps from time to time and then announcing settlements. Compliance officers working at financial firms might want to tell senior management that this enforcement risk isn’t going to go away any time soon, so the firm might as well perform its own audit to identify possible violations and stay ahead of the problem.

I also wonder when, in the fullness of time, the SEC will find a repeat violator, and what sanctions the agency might impose then. I suspect we’ll find out eventually.