SEC Crackdown on Off-Channel Communications: Schwab, Blackstone Among Firms Fined

The Securities and Exchange Commission (SEC) has continued its crackdown on financial firms failing to maintain and preserve electronic communications, with a recent round of settlements totaling over $63 million. Among the firms fined are affiliates of Blackstone, KKR & Co., Apollo Global Management, and Charles Schwab. The SEC's investigations uncovered the use of unapproved communication methods, known as off-channel communications, at these firms, involving personnel at multiple levels, including supervisors and senior managers.



The firms admitted to violating record-keeping provisions of the federal securities laws and agreed to pay civil penalties, with one firm, PJT Partners, receiving a significantly lower penalty of $600,000 for self-reporting its violations. The SEC emphasized the importance of compliance with record-keeping requirements for investor protection and market integrity.

Charles Schwab, one of the firms fined, learned that its phone provider erroneously allowed text messaging on firm phones for about 1,700 personnel without approval, resulting in the loss of about 330,000 text messages, including 215,000 sent and received after January 2020. This lapse in record-keeping highlights the potential for misconduct to go undetected and the importance of proper communication oversight.

The SEC's enforcement actions underscore the need for firms to review and update their compliance policies to address the use of off-channel communications. Firms should deploy existing technology solutions to bring texting and other similar communication methods within their surveillance programs, provide ongoing employee training, and improve supervision processes to effectively detect and prevent compliance violations.

In response to the fines, the firms have agreed to implement improvements to their compliance policies and procedures to address these violations. By taking proactive measures, these firms aim to enhance the transparency and integrity of the markets and their participants, while avoiding future penalties.

The SEC's ongoing commitment to enforcing record-keeping requirements sends a clear message to the financial industry: firms must prioritize compliance with these obligations to protect investors and maintain market integrity. As the regulatory landscape continues to evolve, firms must stay vigilant in their compliance efforts to avoid falling foul of the law.