It was a matter of when, not if. In May 2024, the Wall Street Journal (and other news outlets) reported private equity giants TPG, Blackstone, Carlyle, Apollo and KKR were the subjects of SEC investigations into the firms’ recordkeeping practices related to their employees’ use of banned communication channels.
We now know the outcome of those investigations. On January 13, 2025, the SEC announced Settlement Orders with registered investment advisers associated with TPG, Blackstone, Carlyle, Apollo and KKR (as well as three broker-dealers) resulting in fines of $63 million collectively.
Key Points
Policies and Procedures
The Settlement Orders are similar in many respects. Notably, each Settlement Order spells out the structures the firms had in place regarding recordkeeping requirements and the use of off-channel communication platforms. For example, in the Settlement Order with Blackstone entities, the SEC noted the Blackstone entities:
- adopted compliance policies and procedures, including policies and procedures designed to ensure the retention of business-related records, including electronic communications, in compliance with the relevant recordkeeping provisions;
- repeatedly advised personnel that the use of unapproved electronic communications methods, including on Mobile Devices, was not permitted;
- monitored, reviewed and archived messages sent through firm-approved communications methods; and
- provided training and received employee attestations of compliance.
In each of the Settlement Orders the SEC cites two separate violations – Recordkeeping and Failure to Supervise.
The recordkeeping violations are binary. You either have the records or you don’t. In these cases, the firms didn’t have the required records because they didn’t archive unapproved communication channels (why would you?). Employee non-compliance doomed each firm despite efforts to the contrary by the firms themselves to comply with the rules.
The failure to supervise violation seems harsh. All the firms had policies and procedures in place to retain business-related communication and prevent or detect unapproved communication methods. The SEC seems to believe (wrongly in my opinion) that compliance surveillance can or should detect things outside of their capabilities or require all-encompassing surveillance programs.
Types of Communications
Each Settlement Order cites Rule 204-2(a)(7) as the basis for the violations. Rule 204-2(a)(7) requires that investment advisers preserve originals of all communications received and copies of all written communications sent relating to, among other things:
(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.
As we will see in the following specific examples, the SEC takes a broad view of what sort of communications meet the criteria above. According to the SEC, communications can be internal or external communications, they can involve preliminary discussion or proposed courses of action or minute details for a pre-approved decisions. Which bears the question is everything a business-related communication?
Specific Examples
Perhaps the most helpful pieces of the Settlement Orders are the examples provided by the SEC. The SEC highlighted the following examples:
- A senior managing director exchanging messages with multiple colleagues on an unapproved platform concerning proposed investment advice for a client. (Blackstone)
- A senior managing director exchanging messages with a colleague on an unapproved platform concerning proposed investment advice for a client. (Blackstone)
- A senior managing director exchanging multiple text messages with colleagues on an unapproved platform concerning placing securities trades for a client. (Blackstone)
- A managing director sending and receiving numerous written updates with multiple colleagues on an unapproved platform concerning placing trades for a client. (Blackstone)
- A principal exchanging 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. (TPG)
- A partner exchanging messages with a colleague on an unapproved platform concerning potential trades on behalf of a client fund. (TPG)
- Two partners exchanging 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 the adviser should bid for the client to participate in a transaction, (KKR)
- Two partners exchanging messages on an unapproved platform concerning whether the adviser should offer to have one or more of its private fund clients buy into the junior tranche of a transaction. (KKR)
- A partner exchanging a number of messages on an unapproved platform with colleagues about a proposed recommendation to increase a position for a client. (Apollo)
- A partner exchanged messages with a colleague on an unapproved platform about the terms and execution of a securities transaction for a client. (Apollo)
- A managing director exchanged several messages with an insurance company regarding the disbursement of funds related to a transaction. (Carlyle)
- A partner exchanged messages with another partner about the performance of a Carlyle investment vehicle. (Carlyle)
I am struck by the fact that, if these same conversations occurred in-person or over the phone, firms wouldn’t be responsible for monitoring and archiving the communications but because they occurred in a written medium the SEC considers them required records.All of this brings us back to the September 24, 2024, statement from SEC Commissioners Peirce and Uyeda where they argued even well-intentioned firms could find themselves in the SEC’s enforcement crosshairs.
I work with and talk to firms on a daily basis who are trying to put in place controls and surveillance programs to mitigate the risk of employees using unapproved communication mediums. However, given the breadth of communications the SEC believes falls into the requirement and the way people communicate in these times, unless the SEC changes its view or develops a new rule, hold your breath when it comes to reviews of electronic communications.