More than two years into the SEC’s "off-channel communications" probe, the regulatory body has announced another significant round of settlements with 26 financial firms, totaling $390 million in fines. This wave of settlements is particularly notable for two reasons: (1) it includes the SEC’s second settlement with an entity operating solely as a registered investment adviser (RIA) with no associated broker-dealer, and (2) the SEC has again emphasized that firms that voluntarily self-reported violations received substantially lower fines.

Focus on Registered Investment Advisers (RIAs)

Since the inception of the SEC’s sweep, the majority of settlements have involved registered broker-dealers or entities with dual RIA and broker-dealer registration. However, the recent settlement includes a notable exception—an entity solely registered as an RIA. This development highlights that the SEC’s probe is expanding to include entities that may have previously felt insulated from scrutiny.

The rules governing recordkeeping for broker-dealers and investment advisers differ significantly. Broker-dealers must maintain all communications relating to the firm’s business, while RIAs are only required to preserve communications that fall into four specific categories: recommendations and advice regarding securities, financial transactions, order execution, and predecessor performance. The SEC found that the RIAs involved in the recent settlements failed to preserve communications related to investment advice, violating the narrower recordkeeping rules applicable to them.

These settlements should serve as a cautionary tale for entities operating solely as RIAs, such as private equity firms and hedge funds. Vigilance in maintaining compliant communication records is crucial, and voluntary self-disclosure of any lapses could mitigate potential penalties.

The Benefits of Voluntary Self-Disclosure

The SEC has consistently highlighted the advantages of voluntary self-disclosure in its ongoing enforcement actions. In the latest round of settlements, the SEC specifically noted that three firms received significantly lower penalties because they self-reported their violations. The fines for these firms ranged from $1.6 million to $5.5 million, substantially less than the maximum penalties of $50 million imposed on other entities in this round.

The orders for these self-reporting firms emphasized several proactive measures that aided their case, including:

• Strengthening of internal policies and procedures;
• Investment in advanced surveillance and retention technologies;
• Increased employee training;
• Firm-wide policy reminders;
• Implementation of on-channel messaging applications; and
• Issuance of firm-owned devices for communications.

These actions not only reduced their penalties but also showcased their commitment to regulatory compliance.

Conclusion

The SEC’s recent settlements underscore the ongoing intensity of its "off-channel communications" sweep, with an expanded focus on entities solely operating as RIAs. The case also reaffirms the value of self-disclosure, with self-reporting firms receiving substantially lower penalties. Entities should consider conducting internal investigations and addressing any potential violations proactively to benefit from these potential reductions.