SEC's and CFTC's Enforcement Actions Against Multiple Firms
In its continued pursuit of rooting out and penalizing broker-dealers and investment advisers for their failure to prevent unapproved communication methods, the Securities and Exchange Commission (SEC) has recently taken action against 26 such firms for their extensive and prolonged failures to maintain and preserve electronic communications. Dubbed “off-channel” communications because the means and methods of communication are neither captured nor preserved by their books and records, these entities acknowledged their violations and collectively agreed to pay $392.75 million in civil penalties. The firms also agreed to enhance their compliance policies and procedures to address these shortcomings.
The penalties against the firms include substantial fines, such as $50 million each for Ameriprise Financial Services, Edward D. Jones & Co., LPL Financial LLC, and Raymond James & Associates. RBC Capital Markets was fined $45 million, among others. Notably, three firms that self-reported their violations received significantly reduced penalties.
Separately, the Commodity Futures Trading Commission (CFTC) announced settlements with Toronto Dominion Bank, Cowen and Company, and Truist Bank for related recordkeeping and supervisory conduct involving off-channel communications and swap dealer personnel.
Federal Recordkeeping Requirements and Regulatory Compliance
Federal securities laws require broker-dealers and registered investment advisers to adhere to strict recordkeeping standards in accordance with Section 17(a)(1) of the Securities Exchange Act of 1934, Section 204 of the Investment Advisers Act of 1940. The Federal commodities laws apply similar standards to commodity trading advisors and futures commissions merchants, among others, in Section 1.31 under the Commodity Exchange Act of 1936. The SEC and CFTC have consistently emphasized that compliance with these mandates is vital to protecting investors and enabling regulators to achieve their objectives, such as maintaining fair, orderly, and efficient markets, facilitating capital formation, and conducting its investigations with the production of all relevant communications.
Violations and Investigation Findings
The SEC's and CFTC's investigations revealed widespread and persistent use of off-channel communications across these firms. Employees, including senior management and supervisors, were found to have used personal devices and messaging platforms for business-related communications that should have been recorded and preserved under applicable securities laws and regulations. In addition, the firms were found to have failed to reasonably supervise their personnel to prevent these violations.
In keeping with past practice, the SEC has ordered each firm to cease and desist from future violations, has censured the firms, and the respondent firms each agreed to pay civil penalties.
Notably Lighter Fines for Self-Reporters
Self-reporting firms fared much better in the SEC’s enforcement actions. For example, Truist Securities, Inc. agreed to pay a $5.5 million penalty, Cetera Advisor Networks LLC agreed to pay a $4.5 million penalty, and Hilltop Securities Inc. agreed to pay a $1.6 million penalty. Gurbir Grewal, the director of the SEC’s Division of Enforcement, said that these examples of self-reporting “demonstrat[e]… the real benefits of proactive cooperation.”
Singling out Truist, a self-reporting firm to both the SEC and CFTC, CFTC Director of Enforcement Ian McGinley commented on the CFTC’s settlement and reduced penalty: “In responding to an industry-wide and consequential problem, Truist set itself apart… [its] decision to self-report, cooperate, remediate, and be held accountable allowed it to benefit in the form of a substantially reduced penalty. At the same time, the CFTC’s message remains clear—recordkeeping and supervision requirements are fundamental, and registrants that fail to comply with these core obligations do so at their own peril.”
Industry-Wide Implications
These recent enforcement actions reflect a continuing and persistent trend where regulatory bodies, such as the SEC and CFTC, continue to prioritize compliance with communication and recordkeeping regulations. The significant fines imposed are a stark reminder to firms across the financial industry of the importance of maintaining robust internal controls to manage and document all business communications, notwithstanding current trends in technology to facilitate personal communications.
Given the SEC’s and CFTC's continued unrelenting trend and the significance of the fines imposed, firms would be well-served to review their practices and procedures and implement pragmatic solutions to prevent off-channel investigations. For example, strictly prohibiting unarchived communications for business including, but not limited to, personal emails, text, instant messaging, WhatsApp, Slack, and the chat functions on video platforms like Zoom and Teams. Alternatively, firms can implement a policy of a dedicated telephone number or telephone for business purposes only and employing the use of an archived text messaging application.
