Confusion Outweighs Closure in E-Comms Settlements
On January 13, 2025, the U.S. Securities and Exchange Commission announced the resolution of enforcement actions with five registered investment advisers due to their failure to maintain and preserve internal electronic communications. These settlements mark a significant moment in the SEC Enforcement Division’s ongoing efforts to regulate retention practices for text, WhatsApp, and other communication platforms outside of firm-maintained systems – commonly referred to as “off channel communications” – within the funds industry.
The background of these settlements dates back to October 2022 when the SEC Enforcement Division initiated investigations into the electronic communications retention practices of large fund managers. These probes followed earlier enforcement settlements with major banks and broker-dealers for similar compliance shortcomings under specific requirements set forth under the Securities Exchange Act. By February 2023, media reports characterized this adviser-focused investigation as a growing probe into Wall Street’s use of unofficial messaging platforms like WhatsApp.
In response to these investigations, a coalition of trade associations penned a joint letter to the SEC commissioners and Division Directors expressing concerns over the broadening of the Investment Advisers Act’s “Recordkeeping Rule” to encompass a wider scope of electronic communications retention requirements. Despite various enforcement settlements with investment advisers related to electronic communications, the focus remained largely unresolved until the recent settlements with five global private fund managers shed light once again on the issue.
The settlement orders outlined the violations committed by the advisers, particularly in relation to Rule 204-2(a)(7) requiring the retention of certain written communications. The breaches involved the use of unapproved communication platforms for discussions related to trades or investments, with some interactions involving personnel at different levels within the adviser’s organization. However, the settlements did not suggest any substantive violations of federal securities laws beyond non-compliance with recordkeeping regulations.
While the terms of the settlements required the advisers to admit to the violations and acknowledge their wrongdoing, the sanctions imposed varied from previous settlements with broker-dealers and banks. Monetary penalties ranged from $8.5 to $11 million for each settling party, significantly lower than what the SEC might have sought through litigation. Additionally, the settlement orders mandated remedial actions focused on enhancing processes, training, and technology within the firms to address the compliance failures.
In conclusion, the recent settlements highlight the SEC’s continued efforts to enforce electronic communications retention regulations within the investment advisory industry. These cases serve as a reminder to firms to prioritize compliance with recordkeeping rules and to implement robust systems to ensure the proper retention of electronic communications.
