The Securities and Exchange Commission’s sweep exams of firms over reps’ use of unauthorized communication channels is in full swing and likely to yield more enforcement, two Eversheds Sutherland attorneys said during a regulatory review webinar hosted by technology firm Smarsh this week.

Brian Rubin a former SEC enforcement attorney and now a partner at Eversheds Sutherland and Amanda Oliveira, an associate in litigation and securities enforcement at the firm, along with Marianna Shafir, Smarsh's regulatory advisor, warned Wednesday that the agency is on the lookout for communications like personal emails, texts and social media chats that are taking place on unapproved devices or channels or without required firm surveillance and recordkeeping.

“The SEC is doing sweeps and for those who haven’t received one of these sweep letters, congratulations, but just in case, here are some of the things that they are asking about. You may want to look at your own documentation on these issues to see how you’d do in terms of responding to these kinds of requests,” Rubin said.

The first thing the SEC is asking for is firms’ policies and procedures related to communications platforms and devices, including “bring-your-own” devices like personal cellphones and tablets, he said.

The agency is also asking firms who in management is responsible for enforcement and compliance and for certifying results of internal audits of communications records.

The stakes for firms are high following the SEC’s settlement over off-channel communications with 16 broker-dealer affiliated registered investment advisor firms for $1.1 billion in September, Rubin said.

The settlements cost firms including BofA Securities, Inc., Citigroup Global Securities, Goldman Sachs & Co, and Morgan Stanley & Co. between $50 million and $125 million each. 

SEC staff  “uncovered pervasive off-channel communications The firms cooperated with the investigation by gathering communications from the personal devices of a sample of the firms’ personnel. These personnel included senior and junior investment bankers and debt and equity traders,” the SEC said.

From January 2018 through September 2021, the firms’ employees routinely communicated about business matters using text messaging applications on their personal devices, without preserving the records, which interfered in SEC investigations. “The failings occurred across all of the 16 firms and involved employees at multiple levels of authority, including supervisors and senior executives,” the agency said.

“You have to outline who your off-channel policies apply to. In these cases, senior managers were texting with each other. They’re not exempt from the policies,” Shafir said. 

Policies and training need to underscore what channels and devices are allowed, she continued. “Let them know if they can’t use whatsapp, wechat or Instragram, if you aren’t allowing it. Outline and communicate your policies clearly, so they can’t come back to you and say ‘We didn’t know,’” Shafir continued.

Rubin said the SEC’s enforcement makes clear that reps and others aren’t receiving enough training to apply and understand firm’s policies. 

As part of the sweep, the SEC is now asking if each firm’s training is effective and when it was administered last. “Annual training may not be enough in the current environment if [reps or staff] are working from home, especially if they’re relying rely on what a year or two ago  when they thought texting and using their own devices was fine,” Rubin said.

He suggested using the September settlements as a “scared straight exercise.” 

“Just because you have policies and procedures in place and train doesn’t mean everyone will do the right thing. First management has to walk the walk and talk the talk. What that means is the leadership can’t tell advisors or employees don’t text or use non-company phones, if they do. So, the culture of a company is important,” he added.

Beyond the sweep exams, Rubin and Shafir said that the SEC is actively looking for firms’ off-channel communications using subpoenas, onsite examinations and customer complaints.

Shafir said firms can “absolutely use off-channel communications and devices if they have the technology to capture, surveil and archive.”