Article Contributed by: John Ruark, Clark Hill
The SEC and the CFTC have brought numerous “off channel” communications enforcement actions throughout 2024 for failure to preserve various forms of electronic communications, such as text messages and “WhatsApp” chat messages and for inadequate supervision of such messaging. For example, the SEC brought actions against 11 firms in September 2024, totaling $88 million in sanctions(1). That’s on top of SEC actions against 26 firms in August 2024, totaling more than $390 million in sanctions(2).
The CFTC brought actions against four swap dealer and FCM firms in August 2024, with sanctions totaling $260 million(3). In September, the CFTC brought further actions totaling more than $30 million for off-channel communication recordkeeping and supervision issues(4)(4.1).
Interestingly, all this enforcement activity has led to a few dissents from Commissioners of both the CFTC and the SEC. For example, CFTC Commissioner Summer K. Mersinger dissented with respect to In re Piper Sandler Hedging Services, LLC (5) , stating:
Our enforcement authorities should not be our default tool and should only be wielded after ensuring our expectations for compliance with our regulations are clearly communicated to impacted entities….
Unfortunately, without providing additional clarity into how our Division of Enforcement is approaching recordkeeping requirements, including those in Regulation 1.35 which are implicated in today’s settlement, regulated entities and their associated persons are left to determine what constitutes a violation under the looming threat of a visit from our enforcement attorneys.
Further, CFTC Commissioner Caroline D. Pham has stated in a dissent:
I note that of the three “off-channel communications” cases brought against IBs, two of those firms have de-registered with the CFTC. I question if this is solely a coincidence. I am concerned that when faced with the choice whether to engage in business activity subject to CFTC oversight, firms would rather not participate in our markets than deal with the CFTC (6).
Interestingly, in two of the recent SEC off-channel enforcement matters, the SEC imposed no financial penalty on the respondent firm. This was due, in Atom Investors, LP, to the fact that the Respondent self-reported, took prompt steps to remediate and cooperated with Commission staff(7). Somewhat similarly, In re Qatalyst Partners LP, the SEC imposed no financial penalty due to Qatalyst’s self-reporting, cooperation, remedial efforts and self-policing(8). Notwithstanding this, SEC Commissioners Hester M. Peirce and Mark T. Uyeda jointly dissented with respect to the action against Qatalyst, believing that the SEC was seeking to impose a standard that was impossible for firms to meet. Commissioners Peirce and Uyeda noted the lengthy history of Qatalyst’s strong efforts to comply with applicable SEC recordkeeping and supervision rules(9). They stated:
People are not perfect and so compliance will not be perfect—even at a firm that tries as hard as Qatalyst…. We cannot enforce to perfection, but there is a way to achieve better compliance….
We need to work with the industry and other interested members of the public to develop a pragmatic and privacy-respecting approach that enables firms and the Commission to have the records they need for compliance, examination, and enforcement at a reasonable cost in both financial and privacy terms.
Commissioners Peirce’s and Uyeda’s assessment that the recordkeeping and supervisory obligations that have been applied by the both the SEC and the CFTC in recent years require nothing less than perfection seems correct. Certainly any overworked compliance officer is likely to agree!
The number of recent dissents by commissioners of both the SEC and the CFTC with respect to off-channel communication actions could be an indication that the time for reassessing what is a reasonable balance between ensuring needed records are created while not imposing excessive burdens on regulated firms is drawing close. We can only hope that is the case.