SEC Fines Firms $81 Million to Settle Charges of Mishandling Electronic Communications

According to Investment News last week, several wealth management firms, including Cambridge Investment Research Inc., Northwestern Mutual Investment Services, and Lincoln Financial Advisors Corp., are among 16 companies paying an $81 million fine to settle charges related to mishandling electronic communications, as per the Securities and Exchange Commission (SEC).

The firms reportedly admitted to the violations outlined in the orders, acknowledged their misconduct, and have begun implementing compliance improvements. The investigation primarily focused on improper use of electronic communication, such as personal texting, by employees and financial advisors.

The SEC’s investigation revealed widespread use of unapproved communication methods, known as off-channel communications, at all 16 firms. Employees were found to have communicated about business matters through personal text messages, which were not adequately preserved or maintained, violating federal securities laws.

SEC Penalties Range from $1.5 million to $16.5 Million

The various firms settled the matter with the SEC with penalties that ranged from $1.25 million to $16.5 million, including the following:

• Cambridge Investment Research agreed to pay a fine of $10 million and engage the services of an independent consultant to review the firm’s practices related to business communications.
• Northwestern Mutual Investment Services and two related firms agreed to pay a $16.5 million penalty;
• Guggenheim Securities and one related firm agreed to pay a $15 million penalty.
• Oppenheimer & Co. Inc. agreed to $12 million in penalties
• Key Investment Services and a related firm agreed to pay a $10 million penalty,
• Lincoln Financial Advisors Corp. and another Lincoln firm agreed to pay $8.5 million.
• U.S. Bancorp Investments Inc. Agreed to pay $8 million.
• Huntington Investment Co. and two related firms, which self-reported, agreed to pay $1.25.

Failure to Supervise

FINRA’s Supervision rule requires firms to effectively oversee all aspects of their employees’ activities, including electronic communications. This includes monitoring and regulating how employees use electronic communication channels such as emails and text messages.

Firms must establish policies and procedures to ensure that electronic communications are properly recorded, archived, and reviewed for compliance purposes. Failure to supervise electronic communications adequately can result in violations of regulatory requirements, leading to penalties and fines imposed by regulatory bodies like the Securities and Exchange Commission (SEC).

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