SEC Sends Message Over Off-Channel Communications

Is that a personal call? It better be.

Off-channel communications — business-related messages exchanged through platforms that aren’t approved by a firm — are among the most scrutinized issues in wealth management today, and the Securities and Exchange Commission is taking no prisoners.

Last week, the agency charged 26 broker-dealers and registered investment advisors for “widespread and long-standing failures” to maintain electronic communications, resulting in a combined $392.75 million in penalties for the firms. Ameriprise Financial, Edward Jones, LPL Financial, and Raymond James were hit the hardest, with each agreeing to pay $50 million in fines.

Just Too Easy

So if off-channel comms can land your firm in such hot water with the government, why do it? While there are instances of off-channel comms being used for nefarious purposes like insider trading or market manipulation, Michael Gilbert of the law firm Sheppard Mullin said much of it was a result of the pandemic. 

“People were no longer in the office, they weren’t talking to co-workers face-to-face, and people are so used to using their phone and personal device to text about all sorts of things, so I think it just became natural,” he told The Daily Upside. 

Lawyers at K&L Gates echoed his sentiment, adding that many firms are incorporating “new processes or technological solutions to help ensure that those communications are being maintained.”

What’s Up With WhatsApp? The agency argues it can’t do its job properly when advisors have secret messages between colleagues and clients. Designated work phones and emails at firms are monitored and protected, but when conversation shifts to unapproved platforms, sensitive information may get through regulatory cracks or even be affected by a hack, according to the agency. 

With that in mind, everybody is now fair game in the SEC’s crackdown: 

• Wall Street’s biggest players, including Citi, Goldman Sachs, and Bank of America, were collectively fined more than $1 billion in 2022 for using WhatsApp and personal emails to correspond with co-workers and investors.
• Smaller operations are in the agency’s sights, too, like New York-based Senvest Management. In April, it became the first instance of the SEC taking an RIA to task for off-channel comms.