(Article from Registered Funds Regulatory Update, April 2025)
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The SEC recently settled charges against another nine registered investment advisers and three broker-dealers for recordkeeping failures related to employee use of personal devices in connection with firm business. Since 2021, off-channel communications have been a top SEC compliance priority, demonstrated in real-time, for example, by more than $600 million in civil penalties assessed against companies for off-channel messaging in 2024 alone.
According to the Orders, from at least 2019, 2020 or 2021, various firm employees, across levels of authority, including at senior levels, conducted business through personal text messages and other messaging platforms, such as WhatsApp, without maintaining or preserving the substantial majority of such written communications in violation of the federal securities laws. During the periods of time in question in the Orders, many of the firms received and responded to SEC subpoenas for documents and records in several SEC investigations, which the Orders noted likely impeded the SEC’s investigations and ability to carry out its regulatory functions. The Staff uncovered the firms’ misconduct, with the exception of one firm, after commencing a risk-based initiative to investigate the proper retention of business-related communications via personal devices. The other firm voluntarily reported the communications discovered in relation to its broker-dealer business to the Staff and, as a result, paid a significantly lower civil penalty.
Each firm was charged with violating certain recordkeeping provisions of the Advisers Act and the Exchange Act, as applicable, and failing to reasonably supervise its employees with a view to preventing and detecting violations as required. Each firm agreed to, among other things, a cease-and-desist order, a censure, and civil monetary penalties totaling $63.1 million (with penalties ranging from $4 million to $12 million, with the exception of the self-reporting firm, which paid $600,000).
SEC Press Release, Twelve Firms to Pay More Than $63 Million Combined to Settle SEC’s Charges for Recordkeeping Failures (Jan. 13, 2025), available at: https://www.sec.gov/newsroom/press-releases/2025-6.