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Off-channel Communications Still High on the SEC’s Radar

Apr 3, 2024

mobile phones, mobile apps, off-channel messaging

Although government agencies like the US Securities and Exchange Commission (SEC) acknowledge that communication platforms like WhatsApp and iMessage offer an easy and efficient way to conduct business and are here to stay, they are less than impressed with their effect on federal record keeping compliance.

The SEC and the Department of Justice (DOJ) are taking an increasingly aggressive stance on companies’ use of messaging apps for business communications. Over the past several years, the SEC has charged over 40 firms with off-channel communications violations, fining them billions of dollars. This is Part 1 of a two-part series exploring how organizations can comply with government requirements while maximizing the convenience and productivity that off-channel communications offer.

SEC Record Retention Rules and Off-channel Communications

The SEC’s Rule 17a-4 requires preserving communications in an easily accessible place for at least three years. The Investment Advisers Act of 1940 requires that investment advisers preserve communications received and sent relating to recommendations made or proposed and advice given or proposed to be given, among other things.

Although firms have been preserving email communications for more than 20 years, the COVID-19 pandemic and subsequent surge of remote work have resulted in an explosion of business communications across platforms other than email. Messaging apps like iMessage, WhatsApp, and Signal are often accessed using personal devices without employer authorization. According to the SEC, these communications and the failure to preserve the records they create pose numerous issues when agencies attempt to investigate compliance issues.

Will Pricey Penalties Slow Down the Use of Communication Apps?

The SEC and DOJ are using hard-hitting penalties as a costly deterrent to curb the use of off-channel communication apps on personal devices for business-related communications. In 2022, over a dozen banking institutions, including Morgan Stanley, JPMorgan Chase, Bank of America, and Citigroup, were levied $2 billion in fines for allowing employees to use apps like WhatsApp and Signal without preserving communications. Company executives are further alleged to have known that doing so violated federal record-keeping rules. According to the SEC, one managing director sent and received over 1,400 off-channel business-related messages to colleagues, clients, and others.

Previously, a typical fine for similar violations would have been under $1 million unless fraud or investor harm was alleged. While the SEC encourages voluntary disclosure of record keeping requirements violations, even entities like HSBC and Scotia Capital that cooperated with the SEC’s investigation and voluntarily self-reported violations were still assessed penalties of $15 million and $7.5 million, respectively

The SEC proposed clawback rules to require executives to repay performance based bonuses after an analysis revealed that 2,000 of approximately 5,500 companies on a public US exchange already have clawback provisions, compared to less than half that many in 2015. More companies are expected to put similar measures in place now that the SEC requires companies to recoup pay from employees whose compensation is based on company performance that later requires restatement. For example, Morgan Stanley and JPMorgan Chase are making some of their executives and lower-level employees return a portion of their pay as punishment for using messaging apps capable of being configured to delete business communications.

How Will Agencies Adapt to Changing Communication Technologies?

According to a Compliance Chief 360° report, the dramatic increase in off-channel communication violations emphasizes the need for the SEC to adapt to changing times by adjusting its regulations to fit more recent communication technologies. It argues that traditional regulatory measures are not fully effective in addressing the challenges posed by modern messaging platforms that have clearly (and permanently) changed the face of the modern workplace.

Costly fines are likely no match for the popularity of off-channel messaging apps among businesses. In Part 2 of this series, we will discuss how organizations can address their workforce needs and embrace the productivity benefits of modern communication platforms while ensuring proper compliance.

About the Author

<a href="https://cdslegal.com/team/william-wallace-belt-jr/" target="_blank">William Wallace Belt, Jr., Esq.</a>

William Wallace Belt, Jr., Esq.

Bill has 25 years of experience as a partner, shareholder and board member of AmLaw 200 law firms, including Williams Mullen where he built one of the first law firm eDiscovery practices. For the last 10 years Bill has participated in and now runs a Corporate-Only Roundtable where corporate eDiscovery teams, judges and industry experts have met to share experiences and discuss emerging challenges and solutions that combine technological and legal solutions.

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