With regulators expected to continue cracking down on off-channel communication in 2024, experts at law firm Eversheds Sutherland and compliance firm Smarsh are encouraging financial professionals to perform due diligence now to avoid being swept up in the wave of penalties.
Over the last year, the Securities and Exchange Commission has doled out millions in penalties for off-channel communication failures.
During a recent Smarsh Regulatory Roundup webinar, Eversheds Sutherland Partner Brian Rubin and Associate Andrew Mount said this trend will likely continue.
“The regulators are going to continue focusing on it. We expect that there will be more SEC cases, more FINRA cases,” Rubin said.
“I could definitely see that trend continuing… Definitely more off-channel communications cases, whether it’s more relative to the year before or two years ago, and more firms trying to remediate and self-report,” Mount added.
To keep ahead of this trend, both experts at Eversheds Sutherland, as well as Smarsh Senior Regulatory Compliance Advisor Tiffany Magri, suggested financial firms and independent professionals follow five key steps to ensure compliance.
These guidelines include management leading by example; firms and professionals keeping written policies and procedures; having ongoing training; maintaining adequate surveillance tools for all communications; and self-reporting when there has been a violation.
5 key takeaways
Rubin, Mount and Magri underscored five key takeaways for financial firms to protect themselves against SEC or FINRA action for off-channel communication violations heading into the new year.
The first point Rubin highlighted was the need for management to “express a unified opinion on the use of personal devices and off-channel communications.”
He also addressed the complex issue of self-reporting, stating that firms will have to learn how to deal with it. “No regulated entity wants to self-report, but you have to under [SEC Rule] 4530 under certain circumstances, and it makes sense under other circumstances,” he said.
Mount added that written policies and procedures should provide clear guidance on the types of devices that are permitted to conduct business.
He and Magri also emphasized the need for adequate and frequent training.
Additionally, Mount encouraged firms to adopt an effective surveillance plan that includes video conferencing platforms like Zoom.
“We really think we’ll see more SEC and FINRA enforcement actions over the next year dealing with these issues, so it’s a good idea to take time now to make sure that you’re in compliance with applicable rules,” Mount said.
SEC actions on the rise
According to the SEC’s Fiscal Year 2023 Enforcement Results, there were 501 new enforcement actions filed between October 1, 2022, to September 30, 2023. This is a 3% increase compared to the same period in the previous year.
Cases against broker-dealers accounted for 18% of the SEC’s enforcement actions in FY2023, with 140 actions. This marked a 6% increase compared to the previous period.
Of that amount, 32 were related to off-channel communications violations, specifically “widespread and long-standing failures to preserve and maintain work-related text communications transmitted by employees on personal devices.”
“The firms paid $400 million in cumulative penalties, which is obviously huge and that’s why it’s getting everybody’s attention,” Rubin said. “The penalties ranged from the [relatively] low end of $2.5 million, and the high end of $125 million.”
In some of the rulings, firms were required to retain an independent compliance consultant to prevent the use of off-channel communications. In other cases, individuals were asked to surrender personal devices as part of the investigation.
FINRA cases trending down
On the other hand, Evershed Sutherland’s own data analysis found that Financial Industry Regulatory Authority enforcement actions are trending downwards.
“What we see is that, year-to-date 2023, FINRA filed 287 enforcement cases. This is down from 407 in 2022, which is roughly a 35% decrease,” Mount said.
“We expect the SEC has been and will continue to be very aggressive…and while FINRA may have had a slower year, we don’t see that as an indication that things are likely to slow down overall.”
Rubin noted that the SEC tends to be more focused on off-channel communications than FINRA, but both organizations are likely to continue taking the issue seriously.
He suggested that FINRA is more likely to bring violation cases “organically.”
“Rather than targeting or looking for those kinds of cases, when they pop up, they’re going to bring them,” he said. “We know that the SEC will be bringing more cases in the future, and I’m sure that we’re going to be seeing FINRA cases with these kinds of issues added on in the next few years also.”
Eversheds Sutherland is a global law firm founded in 1988 and based in the United Kingdom. Its more than 4,000 employees provide legal advice across various jurisdictions.
Smarsh is a SaaS company offering compliance and supervisory services to businesses and financial services firms around the world.
Rayne Morgan is a Content Marketing Manager with PolicyAdvisor.com and a freelance journalist and copywriter.
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