Twelve firms, including Blackstone, Charles Schwab and Apollo Capital Management, will pay a combined $63.1 million to settle SEC charges that they failed to keep records of employees who used personal and firm-issued devices to communicate via unapproved platforms.
Parallel charges have previously settled charges against many of the most prominent players in the financial services industry, including Bank of America, Citigroup, Morgan Stanley and UBS.
According to SEC Enforcement Division Acting Director Sanjay Wadhwa, the commission relies on its registrants meeting “books and records requirements” to conduct its oversight.
“When firms fail to meet these obligations, the consequences go far beyond the production of insufficient documents,” he said. “Such failures implicated the transparency and integrity of markets and their participants, such as the firms at issue here.”
According to the commission, Blackstone Alternative Credit Advisors (along with Blackstone Management Partners and Blackstone Real Estate Advisors) agreed to collectively pay $12 million, while Kohlberg Kravis Roberts & Co. agreed to an $11 million penalty.
Schwab paid 10 million dollars, while Apollo, TPG Capital AdvisorsAND Carlyle Investment Management (as well as two subsidiaries) agreed to each pay $8.5 million in fines. Santander US Capital Markets accepted a penalty of 4 million dollars, while PJT Partners self-reported its mistakes and only had to pay a $600,000 fine.
Starting in 2021, the commission launched a “risk-based initiative” looking into whether firms were retaining business-related messages sent on personal devices, and in 2022, staff launched another initiative looking into whether advisers were doing so .
According to the Schwab settlement (the contents of which mirror other settlements), the SEC found out-of-channel communications at “various levels of seniority” within Schwab.
Notably, the firm found that between April 2016 and February 2021, Schwab issued mobile devices to some employees but limited messaging capabilities, with management allowed to “opt out” some employees.
But in January 2021, Schwab learned that its phone provider mistakenly allowed text messages on the firm's phones for about 1,700 personnel without approval, and messages sent and received on those phones were not retained. During that period, Schwab did not retain about 330,000 text messages from those personnel, with 215,000 sent and received after January 2020.
According to the Blackstone settlement, the SEC learned that multiple senior managing directors at the charged firms exchanged messages about a client's investment advice with “numerous colleagues” on an unapproved platform.
Most firms tried to fix the loopholes the commission found, although only PJT Partners self-reported its errors. According to the commission, the firm conducted an internal investigation and had already stepped up compliance efforts before approaching commission staff.
The SEC's broader crackdown on these firms began in 2022 when the commission fined several firms $1.1 billion to pay off similar charges (Firms affected included Morgan Stanley and UBS).
In the years that followed, SECs continued to deploy out-of-channel communication systems rapidly; Last August, more than two dozen b/ds and advisors (including Raymond James, LPL, Edward Jones and Osaic) agreed to pay a combined $392.75 million in fines.
Out-of-channel communication solutions were cited as examples of enforcement actions Presumptive SEC Chairman Paul Atkins could be avoided if it passes congressional approval. Industry experts speculated that Atkins could focus cases against individual registrants, not charging firms for failing to properly supervise their representatives.