In a major headline from the Securities and Exchange Commission, the government agency announced settlements with sixteen firms on February 9, 2024 “for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.” This round follows previous settlements with over a dozen firms in 2023 for similar issues. In total, the firms in the latest round of settlements agreed to pay more than $81 million in combined civil penalties. The highest penalty was paid out by Northwestern Mutual Investment Services and its affiliates at $16 million and the lowest penalty was paid out by Ohio-based Huntington Investment Co. and its affiliates at $1.25 million. Also included in this round were settlements with Guggenheim Securities ($15 million), Oppenheimer ($12 million), Cambridge Investment Research ($10 million), Ohio-based Key Investment Services ($10 million), Lincoln Financial Advisors ($8.5 million), and U.S. Bancorp Investments ($8 million) (along with their respective affiliates). Notably, Huntington Investment Co. self-reported their failure to preserve the communications and, as a result, was charged less than the other firms.
Specifically looking at the charges brought against the firms, all the firms admitted that between 2019 and 2020 their employees communicated through personal text messages about the business of their employers. The employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. Failing to preserve these text message communications was a violation of securities laws as these communications were likely not preserved for future SEC investigations.
The SEC cited willful violations of Section 17(a) of the Securities Exchange Act of 1934 and Section 204 of the Investment Advisers Act of 1940. Section 17(a)(1) of the Exchange Act requires that broker-dealers preserve in an easily accessible place the originals of all communications received and copies of all communications sent relating to the firm’s business as such. Section 204 of the Advisers Act requires that investment advisers preserve originals of all communications received in an easily accessible place, and copies of all written communications sent relating to, among other things, any recommendations made or proposed to be made and any advice given or proposed to be given.
The SEC used the following as examples of conduct that was strictly in violation of Rules:
- Firm personnel sending and receiving off-channel messages that related to, among other things, recommendations made or proposed to be made and investment advice given or proposed to be given to advisory clients.
- A firm Vice-President exchanging off-channel messages with another firm colleague and with a junior employee under their supervision.
- A firm Managing Partner exchanging off-channel messages with firm colleagues and other external contacts in the securities industry relating to investment advice that was to be given to a client.
In addition to the economic penalties, the firms also agreed to cease from further violations, and to update and improve their policies and procedures to address the violations and to retain independent compliance consultants to assist in doing so.
This round of major SEC settlements is a clear indication of the agency’s continued focus on off-channel communications, including its targeting of dual registrants and affiliated registered investment advisor firms in addition to just broker-dealers, and its apparent recognition by the language of at least one of the settlements that the statutory record-keeping requirements for investment advisors is narrower than those covering broker-dealers. However, this latest round of settlements also includes acknowledgment by the SEC that firm-issued devices and/or firm-approved texting applications are remedial/proactive measures that can and should be taken by firms to ensure compliance with applicable rules, and as evidenced by the SEC’s response to Huntington Investment Co., self-reporting such failures can result in lessened penalties.
If you have any questions about this recent round of settlements or have any questions regarding broker-dealer or investment advisor regulations, please contact a member of Reminger's Broker-Dealer and Investment Advisor Regulatory Compliance and Enforcement Practice Group.
