Different ways to communicate | Legal industry | Kirkland & Ellis LLP
The recent settlements by the U.S. Securities and Exchange Commission (SEC) on January 13, 2025, marked the latest phase in the off-channel communications enforcement initiative. The SEC fined 12 SEC-registered broker-dealers and investment advisers, including prominent private equity firms, for their failure to uphold off-channel communications regulations as mandated by federal securities laws.
In this ongoing initiative, the SEC staff discovered and each firm admitted to various infractions, including the widespread use of unapproved communication methods by employees, especially supervisory personnel. These firms also fell short in preserving communications deemed necessary business records due to the use of unauthorized communication methods on both business and personal devices. Additionally, the lack of adequate compliance policies and procedures and failures in supervising employees to prevent and detect such violations were prevalent across these firms.
As part of the settlements, the firms agreed to pay civil penalties ranging from $600,000 to $12 million. These penalties amount to over $625 million in civil penalties imposed in the past year alone, involving around 70 SEC-registered broker-dealers and investment advisers. Since 2021, more than 100 firms have faced penalties exceeding $2 billion in total. Alongside these financial sanctions, each firm received orders to desist from future violations, faced censure, and committed to an internal audit review of their communication practices and compliance policies.
The settlements issued during former SEC Chairman Gensler’s tenure represent the conclusion of this enforcement phase. The impact of the upcoming Trump Administration on future staff efforts remains uncertain, but continued scrutiny on off-channel communications practices is anticipated. The SEC staff’s emphasis on industry compliance in this area is driven by the belief that deficiencies hinder the SEC’s regulatory functions and investigations of securities law violations. This ongoing focus is likely to spur the development of new “best practices” for financial services firms, including private fund advisers, as firms affected by settlements introduce policy and procedural adjustments and technological solutions.
Under the broker-dealer and investment adviser regulatory regimes, firms are required to create and maintain specific books and records related to their businesses, adhering to designated standards and timeframes. Despite narrower requirements for SEC-registered investment advisers compared to SEC-registered broker-dealers, the Staff’s ability to pursue violations against advisers remains robust. The examination of a firm’s records is not limited to those mandated to be kept, and enforcement extends to violations related to policies and procedures, as well as employee supervision.
The key findings from the off-channel communications settlements highlight the disparities between firms’ stated policies and actual practices. Despite having guidelines in place for approved communication methods, implementing monitoring and archiving processes, and conducting employee training, employees were found to utilize unauthorized channels for business communications. This discrepancy exposed failures in compliance, recordkeeping, surveillance, enforcement, and supervisor conduct related to off-channel communications.
Overall, the recent SEC settlements underscore the importance of adhering to off-channel communication regulations, reinforcing the need for firms to review and enhance their communication practices, surveillance mechanisms, and recordkeeping procedures. By staying abreast of regulatory developments and implementing proactive compliance measures, financial services firms can navigate enforcement challenges effectively.
