SEC Off Channel Communications Enforcement Update Broker-Dealers and Municipal Advisors
In remarks at April 3rd, 2023, SEC Speaks 2024 in Washington D.C., the SEC Deputy Director, Division of Enforcement explained the rationale that they SEC has used for determining penalties for Off Channel Communications for Broker-Dealers and Investment Advisors thus far, which includes the select remarks below.
Note that Municipal Advisors as well as Funding Portals are also subject to certain books and records keeping regulations where similar SEC enforcement considerations may be applied. Please contact us for more information.
“Perhaps as a result of that wide range in penalties, there has been a critique from the defense bar that we’re picking numbers at random; that they’re not informed by individualized determinations. I’m here to disabuse you all of that perception: stated simply, we do make an individualized assessment of each firm. I’ll share some of the factors we focus on:
We consider the size of the firm to ensure that the penalties are adequate to serve as a deterrent against future violations. A penalty that may be adequate with one firm may not be adequate with another. That means we look at the firm’s revenues from the regulated parts of its business. We also look at the number of registered professionals at the firm.
We consider the scope of the violations. How many individuals communicated off-channel? How many off-channel communications were there? But since we’re generally dealing with samples, not with the total numbers, there is not a strict correlation between these numbers and the penalty. Consideration of other factors may also result in a relatively larger or smaller recommended penalty.
We take into consideration a firm’s efforts to comply with its recordkeeping obligations and to prevent off-channel communications, focusing, for example, on timely adoption of meaningful technological or other solutions.
We consider precedent. The SEC has now issued 40 settled orders in these matters since December 2021. These precedents are a guide but are not determinative. They are part of an individualized determination; not a substitute for it.
We also consider whether a firm self-reported. This is, in fact, the most significant factor in terms of moving the needle on penalties. From our prior actions, you can see how much we have credited those firms which have chosen to self-report, including the $2.5 million penalty I mentioned.[3]
Finally, we consider cooperation. Firms that do not self-report can still receive credit based on their cooperation with ENF staff during our investigation. We’ll address what cooperation looks like during the panel discussion to follow.
Those are some of the factors we consider when assessing what penalty to recommend in each action. While none of these is dispositive, I want to reiterate that self-reporting is the factor most likely to significantly lower the penalty we recommend.
Those are some of the factors we consider when assessing what penalty to recommend in each action. While none of these is dispositive, I want to reiterate that self-reporting is the factor most likely to significantly lower the penalty we recommend.”
-Deputy Director, Division of Enforcement April 3rd, 2024, Remarks at SEC Speaks 2024 in Washington D.C.
[1] See Press Release, SEC, “SEC Announces Enforcement Results for Fiscal Year 2023” (Nov. 14, 2023), available at www.sec.gov/news/press-release/2023-234.
[2] See Press Release, SEC, “Sixteen Firms to Pay More Than $81 Million Combined to Settle Charges for Widespread Recordkeeping Failures” (Feb. 9, 2024), available at www.sec.gov/news/press-release/2024-18; Press Release, SEC, “SEC Charges Two Credit Rating Agencies, DBRS and KBRA, with Longstanding Recordkeeping Failures” (Sept. 29, 2023), available at https://www.sec.gov/news/press-release/2023-211; Press Release, SEC, “SEC Charges 10 Firms with Widespread Recordkeeping Failures” (Sept. 29, 2023), available at www.sec.gov/news/press-release/2023-212; Press Release, SEC, “SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures” (Aug. 8, 2023), available at www.sec.gov/news/press-release/2023-149; Press Release, SEC, “SEC Charges HSBC and Scotia Capital with Widespread Recordkeeping Failures” (May 11, 2023), available at www.sec.gov/news/press-release/2023-91; Press Release, SEC, “SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures” (Sept. 27, 2022), available at https://www.sec.gov/news/press-release/2022-174; Press Release, SEC, “JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges” (Dec. 17, 2021), available at https://www.sec.gov/news/press-release/2021-262.
[3] See Press Release, SEC, “SEC Charges 10 Firms with Widespread Recordkeeping Failures” (Sept. 29, 2023) (referencing $2.5 million civil penalty against Perella Weinberg), available at www.sec.gov/news/press-release/2023-212; see also Press Release, SEC, “SEC Charges HSBC and Scotia Capital with Widespread Recordkeeping Failures” (May 11, 2023), available at www.sec.gov/news/press-release/2023-91.
[4] See Press Release, SEC, “SEC Sweep into Marketing Rule Violations Results in Charges Against Nine Investment Advisers” (Sept. 11, 2023), available at www.sec.gov/news/press-release/2023-173.
Please see the complete remarks here for additional information: https://www.sec.gov/news/speech/sanjay-wadhwa-sec-speaks-2024-04032024
