The SEC has announced charges against five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for what the regulator called widespread failures by the firms and their employees to maintain and preserve electronic communications.
The firms agreed to pay combined civil penalties of more than $81m, as outlined below, and have begun implementing improvements to their compliance policies and procedures to address these violations, the SEC said.
- Northwestern Mutual Investment Services LLC, together with Northwestern Mutual Investment Management Co. LLC (NMIM) and Mason Street Advisors LLC, agreed to pay a $16.5m penalty;
- Guggenheim Securities LLC, together with Guggenheim Partners Investment Management LLC, agreed to pay a $15m penalty;
- Oppenheimer & Co. Inc. agreed to pay a $12m penalty;
- Cambridge Investment Research Inc., together with Cambridge Investment Research Advisors Inc. (CIRA), agreed to pay a $10m penalty;
- Key Investment Services LLC (KIS), together with KeyBanc Capital Markets Inc., agreed to pay a $10m penalty;
- Lincoln Financial Advisors Corporation, together with Lincoln Financial Securities Corporation (collectively, Lincoln), agreed to pay an $8.5m penalty;
- US Bancorp Investments Inc. agreed to pay an $8m penalty; and
- The Huntington Investment Company (HIC), together with Huntington Securities Inc. (HSI) and Capstone Capital Markets LLC, which self-reported, agreed to pay a $1.25m penalty.
Allegations
As described in the SEC’s orders, the broker-dealer firms admitted that, from at least 2019 or 2020, their employees communicated through personal text messages about the business of their employers.
The investment adviser firms admitted that their employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws, the SEC alleged.
“Once again, one of these orders is not like the others: Huntington’s penalty reflects its voluntary self-report and cooperation.”
Gurbir Grewal, Director, SEC Enforcement Division
The failures involved employees at multiple levels of authority, including supervisors and senior managers, the SEC said.
Each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and agreed to retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices.
Voluntary self-reporting and cooperation
“Today’s actions against these 16 firms result from our continuing efforts to ensure that all regulated entities comply with the recordkeeping requirements, which are essential to our ability to monitor and enforce compliance with the federal securities laws,” said Gurbir S Grewal, Director of the SEC’s Division of Enforcement. “Once again, one of these orders is not like the others: Huntington’s penalty reflects its voluntary self-report and cooperation.”
After identifying off-channel communications, HIC, HSI and Capstone conducted an internal investigation and self-reported the facts to the SEC’s staff, the agency said in its order.
Prior to contacting the Commission, since at least January 2019, HIC, HSI, and Capstone had begun a program of remediation, which included strengthening their policies and procedures by making investments in new technologies to improve surveillance and retention efforts; increasing the number of trainings and sending firm-wide reminders that emphasized the importance of complying with recordkeeping obligations, and, in 2021, making an on-channel texting platform available. HIC, HSI, and Capstone also took proactive steps to collect and preserve off-channel communications, the SEC said.
Disqualifications
A document the SEC posted along with the settlement orders last week is a four-page administrative order called an Order for Certain Broker-Dealer Practices that allows the 16 firms to keep bringing securities offerings to market under relaxed reporting standards where they qualify to do so, even though SEC regulations would typically mean the charged firms couldn’t do so.
Such relaxed standards apply to firms under a variety of regulations, and they only apply if the offerings meet certain conditions – such as when a smaller company is working with a broker-dealer to sell shares to a small number of investors.
The SEC has waived the disqualification so the firms can continue using the relaxed standards they normally qualify for – which has been typical for the SEC in these off-channel communications cases – although less obviously so in the SEC’s prior orders.
Prior actions
The SEC has sanctioned dozens of firms large and small for messaging app violations (see below), emphasized their importance in speeches and in the agency’s fiscal year enforcement priorities, and the Department of Justice Department (DOJ) has emphasized recordkeeping compliance in this arena. DOJ added a section about messaging apps in 2023 to its guidelines for effective compliance programs.
• See our full list of fines and actions issued since September 2022
