Podcast Center
Video Center
Webcasts
Resource Center
Events
By 
March 18, 2024 at 03:07 PM
What You Need to Know
- Regulators have levied more than $3 billion in fines over unauthorized use of texting and chat apps for business purposes.
- The crackdown started with big banks and BDs but the involvement of investment advisors has increased.
- A chief compliance officer says tending to the issue keeps her up at night.
Fines levied by the Securities and Exchange Commission related to off-channel communications like text messages will continue — with fines against investment advisory firms likely on their way, according to two former SEC attorneys.
Off-channel communications is a “continuing hot topic,” Dabney O’Riordan, a partner in Quinn Emanuel’s SEC Enforcement practice, who previously served as the leader of the SEC Enforcement Division’s Asset Management Unit, said at the recent Investment Adviser Association’s annual compliance conference. “We’re expecting to continue to see more.”
Adam Aderton, partner at Wilkie Farr in Washington who previously was co-chief of the SEC Enforcement Division’s Asset Management Unit, stated at the conference, “We’ve started to see more IAs involved in these orders, which I assume is a precursor to IA stand-alone only cases.”
Off-channel communications “is what keeps me up at night this year,” Muyka Porter, chief compliance officer at CIM Group in Los Angeles, added on the panel with O’Riordan and Aderton.
Off-channel communications continues to be front and center for the SEC this year, as the SEC on Feb. 9 hit 16 firms with $81 million in texting fines.
In that order, the 16 firms agreed to pay combined civil penalties of more than $81 million, admitted the facts set forth in their respective SEC orders and acknowledged that their conduct violated recordkeeping provisions of the federal securities laws. The SEC said that its investigations uncovered pervasive and longstanding uses of unapproved communication methods, such as texting, at all 16 firms, and that the firms did not maintain or preserve the substantial majority of the off-channel communications.
Total fines and penalties are now over $3 billion.
O’Riordan noted that “the nature of the cases and how they involve investment advisors have increased.”
While the penalties have “trended downward,” O’Riordan continued, “the penalties are still rather substantial for this type of violation.”
New violations in some cases include two charged firms that self-reported the conduct to the SEC. The agency made a big point that one firm was getting a “big reduction” on the penalty for self-reporting — however, “nothing else really changed in the settlement terms,” O’Riordan said. “There were still admissions required, the charges remained the same, the undertakings were all ordered and the penalty was still a seven-figure penalty for both of those firms that self-reported.”
