While it may have been the Securities and Exchange Commission (SEC) Chair Gary Gensler’s final week at the regulator, the charges totaling $63 million levied against 12 firms for recordkeeping failures relating to off-channel communications may indicate that his legacy will continue well into the new year – and possibly even further.
New year’s reg-olutions
Charges have been raised against nine investment advisors and three broker-dealers for “failures by the firms and their personnel to maintain and preserve electronic communications, in violation of recordkeeping provisions of the federal securities laws.” SEC investigations uncovered “the use of unapproved communication methods, known as off-channel communications” at all firms.
The firms admitted that personnel “at multiple levels of authority, including supervisors and senior managers” sent and received off-channel communications, which meant they were unable to be retained as required by recordkeeping regulations. The firms were also charged with failing to supervise personnel “with a view to preventing and detecting these violations.”
Alongside acknowledging that their conduct violated recordkeeping provisions of federal securities laws, the firms have also “begun implementing improvements to their compliance policies and procedures to address these violations.” Fines against individual firms ranged from $12 million to $600,00 – with a now-familiar reason explaining the lower figure: cooperation.
Not-so dirty dozen
PJT Partners “received credit” and a reduced penalty from the SEC for cooperating with investigation staff, “proactively gathering information and documents concerning the underlying conduct and responding to the staff’s request for additional information.”
This proactive cooperation involved conducting an internal investigation and then self-reporting the results to the Commission. Before approaching the regulator, PJT had
“Already increased compliance efforts, which included testing and implementing an application on employee devices to help keep messaging on-channel and increasing the frequency of electronic communications training for employees. PJT Partners also implemented a process for employees to easily onboard and preserve any off-channel communications that had already taken place.”
In his summary of the enforcements, Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, referenced PJT Partner’s cooperation:
“In today’s actions, while holding firms responsible for their recordkeeping failures, the Commission once more recognized and credited a registrant’s self-report, demonstrating yet again that there are tangible benefits to be gained from proactive cooperation.”
The theme of cooperation, and its potential to mitigate the size of fines against firms that fall foul of enforcement actions, was one the SEC advanced throughout 2024. Initially laid out in a speech by Wadhwa’s predecessor, Gurbir Grewal, a speech by Wadhwa himself in November 2024 outlined the regulator’s drive towards encouraging cooperation between firms and its investigators:
“We have been talking very deliberately about the benefits of cooperation for several years now … In fiscal year 2024, we saw … market participants really stepping up their self-policing, self-reporting, remediation, and other cooperation … It benefits everyone when market participants step up like this.”
The benefits for firms proactively cooperating with SEC investigations are abundantly clear, though not guaranteed. However, given the focus placed on cooperation by senior figures, and the multiple examples of firms that proactively worked with the regulator receiving reduced penalties, firms should not underestimate the importance of proactive cooperation when it comes to compliance.
Recordkeeping vs. record-breaking
Kicking off the year with $63 million in fines may well be a statement of intent from the SEC. In 2024, the regulator filed $8.2 billion in financial remedies, the highest in its history, including $600 million in penalties against more than 70 firms for off-channel communications and recordkeeping violations. Since the SEC’s ‘communications compliance crusade’ began back in 2021, the regulator has levied over $3 billion in penalties as part of actions taken against over 100 firms.
Wadhwa has previously summarized the importance of this initiative to the SEC and to the wider market:
“Perhaps no recent Enforcement initiative has gotten more attention than our ongoing off-channel communications initiative, colloquially known as the WhatsApp initiative, to ensure that regulated entities, including broker-dealers, investment advisers, and credit ratings agencies, comply with the recordkeeping requirements of the federal securities laws.”
For Wadhwa, the impact of the initiative on how firms behave and their attitude towards compliance and cooperation cannot be understated:
“I think the best measure of the success of the initiative is how it has changed industry behavior and spurred proactive compliance by market participants. We’re seeing that in the number of firms that are improving their policies and procedures and implementing remedial measures.”
With the SEC setting records for enforcement totals year-on-year, spurred on by the regulator’s continuing focus on off-channel communications, and senior figure’s attestations that this focus is here to stay, it will be interesting to see whether this latest enforcement sets the tempo for 2025.
With much speculation around what changes incoming SEC Chair Paul Atkins might make to the Commission’s direction and priorities, wise firms will refer to very recent historical examples when making decisions on communications compliance.
