SEC Fines 26 Firms for Off-Channel Client Comms Violations

The Securities and Exchange Commission on Wednesday announced charges against 26 broker/dealers, investment advisers and dually-registered broker/dealers and investment advisers for “widespread and longstanding failures” to preserve electronic client communications such as text messages.

The 26 firms admitted to the facts set forth by the regulator, acknowledged their actions violated recordkeeper provisions and agreed to pay fines that collectively total $392.75 million. The firms also agreed to implement improvements to meet requirements under the Securities Exchange Act and the Investment Advisers Act, or both, as appropriate, and to bulk up supervision to detect violations.

A few firms that self-reported were granted more lenient penalties and noted by the regulator for their “proactive cooperation.”

The charges continue a push by the SEC to crack down on the tracking and maintaining of electronic communications in the digital age. Charges were filed in 2022 against 16 firms, including a number of the country’s largest investment banks, and 10 firms, including broker/dealers, in 2023.

Investment advisers appear to be well aware of the potential for charges: A July survey of 595 firm done by the Investment Adviser Association, ACA Group and Yuter Compliance Consulting found the most-watched area by the firms was “electronic communications surveillance/off-channel communications.”

Three of the firms charged Wednesday self-reported the violations and, therefore, are paying lower civil penalties. Those firms were Cetera Advisor Networks, paying $4.5 million; HilltopSecurities, paying $1.6 million; and Truist Securities, paying $5.5 million.

The four firms assessed the highest penalty amount of $50 million were Ameriprise Financial Inc., Edward D. Jones & Co. LP, LPL Financial LLC and Raymond James & Associates Inc.

Other firms fined included RBC Capital Markets, BNY Mellon Securities Corp. and TD Securities. The full list is available in the SEC’s announcement.

The SEC’s investigations into the firms “uncovered pervasive and longstanding use of unapproved communication methods, known as off-channel communications, at these firms,” according to the announcement. “The failures involved personnel at multiple levels of authority, including supervisors and senior managers.”

“As today’s enforcement actions against more than two dozen firms reflect, we remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement, in a statement. “Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation.”