Twelve firms, including Blackstone, Charles Schwab and Apollo Capital Management, will pay a combined $63.1 million to settle SEC charges they failed to keep records of employees using personal and firm-issued devices to communicate through unapproved platforms.
The charges parallel previously settled charges against many of the most prominent players in the financial services industry, including Bank of America, Citigroup, Morgan Stanley and UBS.
According to SEC Acting Enforcement Division Director Sanjay Wadhwa, the commission relies on its registrants complying with the “books and records requirements” to carry out its oversight.
“When firms fall short of those obligations, the consequences go far beyond deficient document productions,” he said. “Such failures implicated the transparency and the integrity of the markets and their participants, like the firms at issue here.”
According to the commission, Blackstone Alternative Credit Advisors (along with Blackstone Management Partners and Blackstone Real Estate Advisors) agreed to collectively pay $12 million, while Kohlberg Kravis Roberts & Co. agreed to an $11 million penalty.
Schwab paid $10 million, while Apollo, TPG Capital Advisors, and Carlyle Investment Management (as well as two subsidiaries) agreed to each pay $8.5 million in penalties. Santander U.S. Capital Markets agreed to a $4 million penalty, while PJT Partners self-reported its lapses and only had to pay $600,000 in fines.
Starting in 2021, the commission launched a “risk-based initiative” looking into whether firms were retaining business-related messages sent on personal devices, and in 2022, the staff started another initiative looking into whether advisors were doing so.
According to the Schwab settlement (whose content mirrors the other settlements), the SEC found off-channel communications at “various seniority levels” within Schwab.
Notably, the firm found that between April 2016 and February 2021, Schwab issued mobile devices to some employees but restricted texting capabilities, with management allowed to “opt-in” some employees.
But in January 2021, Schwab learned its phone provider erroneously allowed text messaging on firm phones for about 1,700 personnel without approval, and messages sent and received on these phones weren’t retained. During that period, Schwab didn’t keep about 330,000 text messages from those personnel, with 215,000 sent and received after January 2020.
According to Blackstone’s settlement, the SEC learned that numerous senior managing directors at the charged firms exchanged messages about a client’s investment advice with “multiple colleagues” on an unapproved platform.
Most firms tried to fix the gaps the commission found, though only PJT Partners self-reported its lapses. According to the commission, the firm conducted an internal investigation and had already increased compliance efforts before approaching commission staff.
The SEC’s broader campaign against these firms started in 2022 when the commission fined several firms $1.1 billion to settle similar charges (the impacted firms included Morgan Stanley and UBS).
In the years since, the SEC’s continued to roll out off-channel communications settlements in spurts; last August, more than two dozen b/ds and advisors (including Raymond James, LPL, Edward Jones and Osaic) agreed to pay a combined $392.75 million in penalties.
Off-channel communications settlements were cited as examples of the enforcement actions potential SEC Chair Paul Atkins may shy away from if he passes Congressional approval. Industry experts speculated that Atkins might center cases against individual registrants while not charging firms for failing to supervise their reps properly.
