Reed Smith Newsletters

It’s no secret that the U.S. Securities and Exchange Commission’s (SEC) enforcement agenda is aggressive, with reports of record-breaking penalties and claims by some that the SEC is regulating by enforcement rather than providing regulated financial institutions with the clarity they need to comply with the agency’s evolving standards. Navigating this regulatory landscape is complex, and it is critical for companies to understand the core areas of risk and keep up-to-date on key SEC enforcement trends and top priorities in order to remain compliant. In our quarterly newsletter, our cross-practice team provides short summaries of notable developments in securities enforcement and regulation.

1.    Off-channel communications and message retention

SEC registrants that have failed to preserve “off-channel” messaging should strongly consider self-reporting immediately and improving their compliance programs. In December 2021, the SEC announced its first consent resolution – involving the imposition of a $125 million dollar penalty for a leading investment management company – based on that firm’s widespread record-keeping violations. Since then, the SEC has continued to aggressively pursue enforcement cases against registrants whose employees sent and received business-related communications through “off-channel” or unsupervised platforms. In the ensuing period, the SEC has issued detailed consent resolutions detailing that many registrants failed to preserve communications made through platforms such as personal email, SMS messaging, and other unsupervised communication channels such as WhatsApp and WeChat. As a result, the SEC concluded that registrants were not properly retaining records as required by SEC rules 17a-3 and 17a-4 and other record-keeping provisions.

Recent developments

While the SEC continues investigations and enforcement actions in this space, including issuing another $125 million dollar penalty against a major industry participant in 2023, in more recent matters, the SEC has also underscored the value of compliance, remediation, and self-reporting.

In September 2023, 10 registrants agreed to pay combined penalties of $79 million dollars and to conduct comprehensive reviews of their policies and procedures relating to the retention of off-channel communications. While certain respondents were assessed eight-figure penalties, one case was resolved with a $2.5 million dollar penalty, primarily because the respondents self-reported their violations. In relation to that matter, SEC Enforcement Director, Gurbir S. Grewal, noted that “[o]ne of the orders included in today’s announced actions is not like the others” and that “[t]here are real benefits to self-reporting, remediating, and cooperating.”