Tag: Off-Channel Communications

Investment Advisers Hit with Texting Fines

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:

Another Half-Billion in Fines for Texting

The Securities and Exchange Commission and the Commodity Futures Trading Commission levied another $475 million in fines against broker-dealers, investment advisers and commodities firms. Ameriprise, Edward D. Jones, LPL and Raymond James each paid a $50 million fine. Millions in fines because firm employees were texting with clients and business partners.

The order against P. Schoenfeld Asset Management LP provided some insight on the SEC’s approach toward investment advisers and fund managers. PSAM is registered as an investment adviser. It is not broker-dealer or dually registered as a BD-IA.

The SEC points out four areas of records that are required under the IA record-keeping requirements:

(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.

PSAM’s policy was that ’employees were “prohibited from conducting PSAM business using any other electronic communication services . . . or accounts not provided by PSAM”’. That is probably broader than the SEC record-keeping rule requires.

Even with its stricter policy, PSAM appears to have breached the record-keeping requirements. The Order refers to “pervasive off-channel communications.” The SEC examiners found records in these other platforms that were required to be retained. As an example, off-channel communications were sent to and from PSAM clients, counterparties, and other financial industry participants.

It sounds to me like SEC examiners looked at personal devices.

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Off-Channel Communications Enforcement Comes to Private Funds

Over the past 2.5 years the Securities and Exchange Commission has charged 60 investment advisory firms and broker-dealers with violations of the record-keeping requirements and collected penalties approaching $2 billion. Those were all broker-dealers, dual-registered investment advisers, or affiliated investment advisers. Broker-dealers have strict communications retention mandates. Investment adviser requirements are not as strict. Private fund managers are thought to be a bit more uncertain. Everyone agrees that substantive business communications need to be captured and retained.

The first fund manager to fall into the Off-Channel Communications net is Senvest Management in New York. The firm had to pay a $6.5 million fine because employees were texting business-related messages.

Senvest has policies and procedures that required business communication to be retained, has the platforms to do so, and prohibits off-channel business communication. Senvest employees did not comply with the policies and sent thousands of business-related messages through non-firm systems. Even worse, some of these off-channel communications were on platforms that automatically deleted messages after a few months.

The take away is that private funds need to step up the monitoring of Off-Channel Communications. Senvest employees sent and received “thousands of business-related messages” using off-channel communications. Some of those included “communications concerning recommendations made or proposed to be made and advice given or proposed to be given about securities.” Those seem to be core records to be retained.

The other problem is that Senvest’s compliance manual said that the firm would “retain all electronic communications that it sends and receives.” The compliance manual also provided that employees were “strictly prohibited from using non-Senvest electronic communication services for any business purpose.”

Those compliance manual provisions might be more strict than required by the Investment Advisers Act.

Senvest was also penalized because it did not check employee devices to determine if they were complying with the firm’s policies and procedures. I think we need to take that message. Sounds to me that the SEC is laying down a requirement that compliance needs to run periodic checks of personal devices.

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