Ten firms will pay a collective $79 million to settle SEC charges that firm employees, including senior management, conducted business conversations on off-channel communications, including text messages and WhatsApp.
The firms charged consist of broker/dealers, dual registrants and two affiliated investment advisors. They include Interactive Brokers, which will pay $35 million, Robert W. Baird & Co. ($15 million), William Blair & Company ($10 million), Nuveen Securities ($8.5 million) and Fifth Third Securities ($8 million).
Unlike the other firms, Perella Weinberg Partners (also working as Tudor, Pickering, Holt & Co. Securities) self-reported and agreed to a $2.5 million penalty, with SEC Enforcement Director Gurbir S. Grewal singling them out as “not like the others” in the SEC announcement.
“There are real benefits to self-reporting, remediating and cooperating,” Grewal said in a statement about the charges.
The settlements with the firms mirror similar charges against some of Wall Street’s largest firms and wirehouses last year, resulting in a mammoth $1.1 billion in total penalties.
The latest charges are broadly similar between firms, and emanate from an SEC investigation launched in September 2021 to find out if b/ds were retaining business-related messages sent on personal devices. Interactive, like other firms, allowed for searches of personnel devices, including directors, officers, managers and programmers.
SEC investigators soon found “pervasive off-channel communications at all seniority levels” of the broker/dealer, with nearly all the firm’s personnel sampled having engaged “in at least some level” of off-channel communications on personal devices, with messages sent to other firm employees, customers and other industry participants.
Violators included “a significant number of directors, officers and managers,” according to the settlement order. In one case, a group head in a U.S. leadership role had off-channel business-related communications in texts and WhatsApp with at least 32 other employees, including 13 they supervised.
Another manager used texting and GroupMe (a group messaging application owned by Microsoft) messages to contact at least 20 other employees, including 18 they oversaw, according to the SEC. In the case of the investment advisory firms, investigators also found evidence that employees sent and received off-channel communications related to recommendations they made or advice given to clients.
The commission also knocked Interactive (and the other firms) for failing to properly preserve the required records, a move that “likely deprived the commission of these off-chanel communications in various investigations,” according to the Interactive order (the b/d also settled charges with the Commodity Futures Trading Commission for related conduct).
In the case of Perella, the firm voluntarily approached SEC staff in June of this year regarding off-channel communications it found after its own internal investigation, and subsequently cooperated with the commission’s inquiry. According to the SEC staff, the commission “considered” the firm’s self-reporting when determining the settlement (and penalty).
Last year, the SEC brought charges against 16 of the biggest firms on Wall Street, including Goldman Sachs, UBS, Merrill Lynch, Citigroup and others for employees’ widespread use of off-channel communications (including via WhatsApp) and for the firms’ failure to preserve those conversations.
Compliance experts at the time viewed it as a “shot against the bow” for firms, warning registrants to expect questions about off-channel communications to be a routine part of SEC exams moving forward. In an interview at the time with WealthManagement.com, MarketCounsel Chief Regulatory Attorney Dan Bernstein warned that every registrant would be on the hook to comply, regardless of size.
“It’s going to trickle down,” he said. “It’s not an instance where it’s only going to be limited to large financial institutions.”
In addition to the penalties, the settling firms agreed to cease-and-desist orders and censures, and also acquiesced to hiring an independent compliance consultant to conduct reviews of policies and procedures related to retaining electronic messaging.
