Alexia Mandoeng
Associate Editor
Loyola University Chicago School of Law, J.D. Candidate 2025
The U.S Securities and Exchanges Commission (“SEC”) has targeted its attention toward monitoring and regulating the off-channel communications of its registrants. In the past few years, the SEC has imposed penalties exceeding $2 billion, with the most recent charges being brought against 10 broker-dealers and investment advisors for “widespread and longstanding failures to maintain and preserve electronic communications.” Under the Exchange Act Rule 17 C.F.R. §240 17a-4, firms are required to record and preserve business communications. However, this has proven difficult in the digital age due to the widespread use of multiple messaging mediums and the increasingly blurred line between standard and ‘business’ communication.
Off-channel communications
While email preservation has been standard practice for registrants since the early 2000s, the landscape has evolved significantly with the surge of electronic communications across various non-email platforms, especially amid the COVID-19 pandemic and the prevalence of remote work. The adoption of off-channel communication methods—such as social media platforms, instant messaging apps, email, and various digital platforms—has marked a significant shift in how companies engage with each other and the public at large. The allure of these off-channel avenues lies in their flexibility and speed, enabling swift interactions and broader outreach. However, this convenience also introduces potential risks, ranging from information accuracy and data security to adherence to regulatory compliance standards. As a result, the SEC has intensified its vigilance over these off-channel communications.
Penalties
In September 2023, the SEC announced charges against 10 firms for a violation of record-keeping provisions within federal securities laws. The firms, including five broker-dealers, three dually registered broker-dealers and investment advisers, and two affiliated investment advisers, disclosed that their employees, “communicated through personal text messages about the business of their employers…and sent and received off-channel communications related to recommendations made or proposed”. Further, the firms failed to retain or preserve the vast majority of these off-channel communications. As a result, the SEC found them non-compliant and charged combined penalties totaling $79 million. To address these record-keeping weaknesses, the firms agreed to not only pay the fines but also implement corrective measures in their compliance processes and procedures.
Lessons for other firms
The ever-evolving nature of technology, especially in a post-pandemic world, continues to alter communication in the workplace, necessitating robust regulatory compliance programs to effectively preserve electronic communications. Ensuring that off-channel communications uphold the same standards of transparency, fairness, and accuracy as traditional channels has become paramount. This requires companies to establish and maintain comprehensive policies that govern the use of personal devices and seek external legal counsel to review and update existing policies and procedures to align with the constantly shifting regulatory landscape.
Furthermore, merely having a policy addressing the use of personal devices is no longer sufficient. Companies must actively demonstrate their commitment to compliance and take proactive steps to ensure adherence to regulations. If a firm discovers non-compliance with off-channel communication policies and regulations among its employees, immediate consultation with external legal counsel is crucial.
However, firms do not bear the entire blame for their lack of compliance. Compliance experts have called for regulators to clarify what is meant by ‘business communication’ to make the regulations simpler to comply with.
Looking ahead
In conclusion, firms find themselves navigating the intricate landscape of off-channel communication while dealing with the stringent oversight of the SEC. The critical adherence to comprehensive record-keeping requirements and the proactive commitment to compliance are pivotal in this digital age. Firms that proactively address these challenges and work in collaboration with regulatory authorities are better positioned to effectively manage the constantly evolving world of communication. Finding the balance between leveraging modern communication tools and abiding by strict compliance standards becomes an essential element for success in the services sector.