Over the last several years, the Securities and Exchange Commission (the “SEC”) and the Commodities Futures Trading Commission (“CFTC”) have been laser-focused on the use of so called “off-channel communications” in the financial services industry. On the theory that employees’ use of personal devices to communicate about business matters violates the “books and records” rules as these communications are not saved in company systems, regulators have conducted intrusive and extensive investigations requiring employees to turn over their personal devices for review. SEC Chairperson Gary Gensler recently stated that “bookkeeping sweeps are ongoing,” having resulted in well over $1 billion in fines so far. While the first round of investigations focused on the large banks, this “sweep” has since spread to hedge funds, credit rating agencies, online banking platforms, and now, to regional banks.

Any company regulated by the SEC and CFTC should prepare for significant possibility that they, too, will be contacted by regulators and required to conduct an off-channel communication investigation. For companies who have not already reviewed their policies and procedures related to communications, they should do so immediately. This blog post provides an overview of the pertinent rules and history of the off-channel communication sweep..

Rules

• Broker-Dealers: The rules adopted under Section 17(a)(1) of the Exchange Act, including Rule 17a-4(b)(4), require that broker-dealers preserve in an easily accessible place originals of all communications received and copies of all communications sent relating to the firm’s business as such.

• Investment Advisors: The rules adopted under Section 204 of the Advisers Act, including Advisers Act Rule 204-2(a)(7), require that investment advisers preserve in an easily accessible place originals of all communications received and copies of all written communications sent relating to, among other things, any investment advice given or proposed to be given.

• Swap Dealers/CFTC Registrants: Sections 4g and 4s of the Commodity Exchange Act, and the regulations implemented thereto, require that swap dealers and other CFTC registrants retain comprehensive records of their business-related communication.

Electronic communications include, but are not limited to, email, text messages, messaging apps, instant messages, Bloomberg messaging, and private messaging on social media sites.

History

The first major regulatory action based on off-channel communications was announced in December 2021, when the SEC and CFTC fined JP Morgan $200 million based on widespread off-channel communications. In September 2022, the SEC and CFTC fined eleven investment banks, which collectively paid $1.8 billion in fines and each agreed to certain compliance requirements, including hiring a compliance consultant and submitting to a one-year compliance evaluation. It has been publicly reported that, as part of these investigations, regulators have required a review of the personal devices for a sample pool of employees, the results of which showed that certain employees were engaging in off-channel business communications.

Putting It Into Practice

Following the settlement with the large banks, the regulators have moved to hedge funds, private equity firms, ratings agencies, online banks, and regional banks. Sheppard Mullin’s Governmental Practice team has experience handling this unique regulatory investigation, having represented over thirty employees of institutions involved in this enforcement initiative.

This off-channel sweep is a novel regulatory investigation for which there is little guidance. The process inevitably involves the highly sensitive process of obtaining personal cell phones from employees and reviewing their private communications to identify those that fall within the scope of the regulators’ requests.