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SEC Fines 16 Firms $81 Million Over Off-Channel Communications

SEC Fines 16 Firms $81 Million Over Off-Channel Communications. Securities and Exchange Commission, SEC, charges, broker-dealer, registered independent adviser, RIA, Northwestern, Cambridge, Guggenheim, Oppenheimer, Mason Street, Key Investment Services, Lincoln, U.S. Bancorp, KeyBank Capital Markets, Huntington, Capstone Capital Markets

The Securities and Exchange Commission charged five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.

The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined civil penalties of more than $81 million, and have begun steps to improve their compliance policies and procedures. The entities are:

  • Northwestern Mutual Investment Services LLC, together with Northwestern Mutual Investment Management Co. LLC and Mason Street Advisors LLC (collectively, Northwestern Mutual), agreed to pay a $16.5 million penalty;
  • Guggenheim Securities LLC, together with Guggenheim Partners Investment Management LLC (collectively, Guggenheim), agreed to pay $15 million;
  • Oppenheimer & Co. Inc. agreed to pay $12 million;
  • Cambridge Investment Research Inc., together with Cambridge Investment Research Advisors Inc. (collectively, Cambridge), agreed to pay $10 million;
  • Key Investment Services LLC, together with KeyBanc Capital Markets Inc. (collectively, Key), agreed to pay $10 million;
  • Lincoln Financial Advisors Corporation, together with Lincoln Financial Securities Corporation (collectively, Lincoln), agreed to pay $8.5 million;
  • S. Bancorp Investments Inc. agreed to pay $8 million; and
  • The Huntington Investment Company, together with Huntington Securities Inc. and Capstone Capital Markets LLC (collectively, Huntington), which self-reported, agreed to pay $1.25 million.

“Today’s actions against these 16 firms result from our continuing efforts to ensure that all regulated entities comply with the recordkeeping requirements, which are essential to our ability to monitor and enforce compliance with the federal securities laws,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “…One of these orders is not like the others: Huntington’s penalty reflects its voluntary self-report and cooperation.”

Prior reporting by The DI Wire has captured similar charges and large settlements. The SEC issued $539 million in fines against 10 broker-dealers and one dually registered broker-dealer and investment adviser in August 2023 for their use of private messaging. In December 2021, “widespread and longstanding failures” by J.P. Morgan Securities LLC to maintain and preserve written communications led to an $125 million penalty from the SEC.

In the current investigation, the SEC uncovered pervasive and longstanding uses of unapproved communication methods, known as off-channel communications, at all 16 firms. As described in the SEC’s orders, the broker-dealer firms admitted that, from at least 2019 or 2020, their employees communicated through personal text messages about the business of their employers. The investment adviser firms admitted that their employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws. By failing to maintain and preserve required records, some of the firms likely deprived the SEC of these off-channel communications in various SEC investigations. The failures involved employees at multiple levels of authority, including supervisors and senior managers.

Guggenheim Securities, Cambridge Investment Research, Huntington, Key, Lincoln, Northwestern Mutual Investment Services, Oppenheimer, and U.S. Bancorp were each charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to reasonably supervise with a view to preventing and detecting those violations. Cambridge Investment Research Advisors, Guggenheim Partners Investment Management, Huntington Investment Company, Key Investment Services, Lincoln, Northwestern Mutual Investment Management, and Mason Street were each charged with violating certain recordkeeping provisions of the Investment Advisers Act of 1940 and with failing to reasonably supervise with a view to preventing and detecting those violations.

In addition to the significant financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and was censured. The firms also agreed to retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing noncompliance by their employees with those policies and procedures.

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