The American Securities Association is suing the Securities and Exchange Commission for failing to produce documents under the Freedom of Information Act regarding its off-channel communications sweep.
In September 2021, the SEC began to investigate certain broker-dealers' retention of "off-channel" communications, such as text messages on personal devices, states the lawsuit, filed Thursday by ASA, a trade group representing regional financial services firms, in the U.S. District Court for the Middle District of Florida.
The agency "launched a suspicion-less investigation into whether certain broker-dealers were properly retaining business-related text messages sent and received on personal devices as required by the Commission's rules," the lawsuit states.
The lawsuit, according to ASA, concerns the "SEC's unprecedented enforcement activities and the agency's refusal to disclose its records of these activities" under FOIA.
"The purpose of the Freedom of Information Act is to ensure the public has access to information in the possession of federal agencies so the people can hold their government accountable," ASA president and CEO Chris Iacovella said Thursday in a statement. "Unfortunately, the SEC has failed to comply with its FOIA obligations, and that is why ASA filed this lawsuit. The American public must have transparency into the SEC's enforcement process."
In March, ASA states that it filed three FOIA requests for records concerning the SEC's "off-channel" communications sweep.
"The SEC, however, has refused to produce any documents in response to these requests," the group said.
The agency citied an exemption to FOIA for requests that could be expected to interfere with law enforcement proceedings, but "did not explain why the Exemption applied or why it justified a blanket withholding of every responsive document," according to the lawsuit.
ASA is seeking to force the SEC to turn over the documents and to recoup its attorneys' fees.
The SEC declined comment on ASA's suit.
Sweep Details
The period the SEC was investigating included 2020 and 2021, which covered the COVID-19 years when many employees were forced to work from home, the lawsuit explains.
As a result of the investigations, the SEC "ultimately entered into settlements that imposed billions of dollars in penalties" on broker-dealers.
"But there appears to be no rhyme or reason for how the SEC imposed these penalties, and the SEC has provided little explanation into its decision making," ASA maintains.
"The regulated community thus is left with many questions," the lawsuit states. "How were these penalties calculated? And why were they targeted in the first place? Or, as two SEC Commissioners recently put it, is the SEC's penalty regime simply 'a tool to generate numbers for year-end statistics' rather than 'a means to achieve outcomes that enhance market integrity and investor protection?'"
As part of the investigation, the SEC "sent demands to many companies instructing them to produce documents related to their retention of 'off-channel' communications, such as text messages through mobile phone apps," the lawsuit continues.
The SEC's investigation included communications made "when COVID-era lockdowns disrupted routines and forced many employees to work from home," the lawsuit states. "Three months later, the settlements were announced, and the fines started rolling in."
On Feb. 9, the SEC 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.
Total fines and penalties are now over $3 billion.
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