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Tag: Off-Channel Communications

Another Half-Billion in Fines for Texting

The Securities and Exchange Commission and the Commodity Futures Trading Commission levied another $475 million in fines against broker-dealers, investment advisers and commodities firms. Ameriprise, Edward D. Jones, LPL and Raymond James each paid a $50 million fine. Millions in fines because firm employees were texting with clients and business partners.

The order against P. Schoenfeld Asset Management LP provided some insight on the SEC’s approach toward investment advisers and fund managers. PSAM is registered as an investment adviser. It is not broker-dealer or dually registered as a BD-IA.

The SEC points out four areas of records that are required under the IA record-keeping requirements:

(a) any recommendation made or proposed to be made and any advice given or proposed to be given;
(b) any receipt, disbursement, or delivery of funds or securities;
(c) the placing or execution of any order to purchase or sell any security; or
(d) predecessor performance and the performance or rate of return of any or all managed accounts, portfolios, or securities recommendations.

PSAM’s policy was that ’employees were “prohibited from conducting PSAM business using any other electronic communication services . . . or accounts not provided by PSAM”’. That is probably broader than the SEC record-keeping rule requires.

Even with its stricter policy, PSAM appears to have breached the record-keeping requirements. The Order refers to “pervasive off-channel communications.” The SEC examiners found records in these other platforms that were required to be retained. As an example, off-channel communications were sent to and from PSAM clients, counterparties, and other financial industry participants.

It sounds to me like SEC examiners looked at personal devices.

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Off-Channel Communications Enforcement Comes to Private Funds

Over the past 2.5 years the Securities and Exchange Commission has charged 60 investment advisory firms and broker-dealers with violations of the record-keeping requirements and collected penalties approaching $2 billion. Those were all broker-dealers, dual-registered investment advisers, or affiliated investment advisers. Broker-dealers have strict communications retention mandates. Investment adviser requirements are not as strict. Private fund managers are thought to be a bit more uncertain. Everyone agrees that substantive business communications need to be captured and retained.

The first fund manager to fall into the Off-Channel Communications net is Senvest Management in New York. The firm had to pay a $6.5 million fine because employees were texting business-related messages.

Senvest has policies and procedures that required business communication to be retained, has the platforms to do so, and prohibits off-channel business communication. Senvest employees did not comply with the policies and sent thousands of business-related messages through non-firm systems. Even worse, some of these off-channel communications were on platforms that automatically deleted messages after a few months.

The take away is that private funds need to step up the monitoring of Off-Channel Communications. Senvest employees sent and received “thousands of business-related messages” using off-channel communications. Some of those included “communications concerning recommendations made or proposed to be made and advice given or proposed to be given about securities.” Those seem to be core records to be retained.

The other problem is that Senvest’s compliance manual said that the firm would “retain all electronic communications that it sends and receives.” The compliance manual also provided that employees were “strictly prohibited from using non-Senvest electronic communication services for any business purpose.”

Those compliance manual provisions might be more strict than required by the Investment Advisers Act.

Senvest was also penalized because it did not check employee devices to determine if they were complying with the firm’s policies and procedures. I think we need to take that message. Sounds to me that the SEC is laying down a requirement that compliance needs to run periodic checks of personal devices.

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