Twelve firms were hit with fines for off-channel communications. I’ve been waiting for these cases to come out. A couple of these firms have publicly traded securities and there have been notes that they are working through enforcement actions for off-channel communications.
- Blackstone Alternative Credit Advisors LP, together with Blackstone Management Partners L.L.C. and Blackstone Real Estate Advisors L.P., agreed to pay a combined $12 million penalty;
- Kohlberg Kravis Roberts & Co. L.P. agreed to pay a $11 million penalty;
- Apollo Capital Management L.P. agreed to pay a $8.5 million penalty;
- Carlyle Investment Management L.L.C., together with Carlyle Global Credit Investment Management L.L.C., and AlpInvest Partners B.V., agreed to pay a combined $8.5 million penalty;
- TPG Capital Advisors LLC agreed to pay an $8.5 million penalty;
- Charles Schwab & Co., Inc. agreed to pay a $10 million penalty;
- Santander US Capital Markets LLC agreed to pay a $4 million penalty;
- PJT Partners LP, which self-reported, agreed to pay a $600,000 penalty.
Santander and PJT are broker-dealers and subject to the strict record-keeping of that regulatory regime. Schwab is duly registered. The rest are pure investment advisers.
My reading of the orders indicates that those firms were subject to a sweep examination by the SEC focused on off-channel communications. The SEC asked for review of mobile devices. They found messages that were required to be retained as business records under Rule 204-2(a)(7).
Here are the four areas the SEC mentioned in the orders:
(a) any recommendation made or proposed to be made and any advice given or proposed to be given;
(b) any receipt, disbursement or delivery of funds or securities;
(c) the placing or execution of any order to purchase or sell any security; or
(d) predecessor performance and the performance or rate of return of any or all managed accounts, portfolios, or securities recommendations.
Let’s see if the those orders give us any insight into the SEC’s take on off-channel communications for investment advisers.
Blackstone:
For example, a Blackstone Alternative Credit Advisors senior managing director exchanged messages with multiple colleagues on an unapproved platform concerning proposed investment advice for a client. Similarly, a Blackstone Management Partners senior managing director exchanged messages with a colleague on an unapproved platform concerning proposed investment advice for a client. Additionally, a Blackstone Real Estate Advisors senior managing director exchanged messages with multiple colleagues on an unapproved platform concerning investment advice for a client.
TPG:
For example, a TPG Capital Advisors principal exchanged multiple messages with a colleague and with personnel at another investment adviser on an unapproved platform concerning a proposed investment by a client fund in a target company.
For example, a TPG Capital Advisors partner exchanged messages with a colleague on an unapproved platform concerning potential trades on behalf of a client fund.
KKR:
For example, two KKR partners exchanged messages on an unapproved platform concerning the specific pricing, within the range previously approved by the investment committee responsible for a client’s investments, at which KKR should bid for the client to participate in a transaction.
As another example, the two KKR partners exchanged messages on an unapproved platform concerning whether KKR should offer to have one or more of its private fund clients buy into the junior tranche of a transaction.
Apollo:
For example, an Apollo partner exchanged a number of messages on an unapproved platform with Apollo colleagues about a proposed recommendation to increase a position for a client. Another partner exchanged messages with a colleague on an unapproved platform about the terms and execution of a securities transaction for a client.
Carlyle:
For example, a managing director affiliated with Carlyle Credit exchanged several messages with an insurance company regarding the disbursement of funds related to a transaction. In another example, a partner associated with Carlyle exchanged messages with another partner about the performance of a Carlyle investment vehicle.
The big question is whether these off-channel communications investigations are going to continue under the new SEC Chair. These seem like relatively easy wins for the SEC. And they keep compliance officers up at night.
Sources:
- Twelve Firms to Pay More Than $63 Million Combined to Settle SEC’s Charges for Recordkeeping Failures
- Investment Adviser Record-Keeping Rule Rule 204-2
- SEC Order – Blackstone Alternative Credit Advisors LP, Blackstone Management Pa…
- SEC Order – TPG Capital Advisors, LLC
- SEC Order – Kohlberg Kravis Roberts & Co. L.P.
- SEC Order – Apollo Capital Management, L.P.
- SEC Order – Carlyle Investment Management L.L.C., Carlyle Global Credit Investm…
- SEC Order – PJT Partners LP
- SEC Order – Santander US Capital Markets LLC
- SEC Order – Charles Schwab & Co., Inc.