Off-Channel Communications and Recordkeeping Failures Result in $1.1B in Fines: Lessons for Compliance Professionals
In September 2022, the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) fined 15 broker-dealers and one affiliated investment adviser a total of $1.1 billion for violations related to the unauthorized use of off-channel communications, such as text messages and WhatsApp. The firms admitted to failing to implement appropriate policies and controls with respect to these communications, resulting in violations of SEC and CFTC rules. The failure to implement controls led to incomplete responses to regulatory requests and may have hindered other regulatory investigations.
These fines were a reminder to compliance professionals that off-channel communications and recordkeeping failures remain a priority for the SEC. In fact, the last major fines related to off-channel communications and recordkeeping were issued in December 2021 against J.P. Morgan for $125 million, which bore striking similarities to the facts and admissions of failure by the 16 firms in the September 2022 cases.
Financial institutions are not alone in feeling the pain of regulatory fines when it comes to business-related communications and recordkeeping failures. In 2019, FINRA disciplined a Chief Compliance Officer for failing to ensure that their member firm archived and reviewed business-related emails, even with the knowledge that a registered representative was engaged in an outside business activity using a D/B/A entity. The chief compliance officer was fined $5,000 and suspended from association with any FINRA member firm for 30 days.
Compliance professionals across the broker-dealer, investment adviser, and futures/swaps dealer spaces have taken different approaches to handling off-channel communications. However, they agree on one thing: this topic remains a priority for the SEC. Firms should ensure that their policies and controls are up to date and that they are taking the necessary steps to comply with SEC and CFTC rules regarding off-channel communications and recordkeeping. By doing so, they can avoid potentially costly fines and maintain the trust of their clients and regulators alike.
This information comes from Erin Preston, SVP Chief Compliance Officer at Wedbush Securities and Matthew Rossi, Senior Compliance Manager at Citizens Capital Markets, Inc and appeared in the March 2023 edition of NSCP Currents. The full article also includes Sample Policies and Procedures.
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