Last month, I asked whether the SEC had opened a “new frontier in the battle against off-channel communications.” Apparently, I wasn’t alone in thinking the SEC’s enforcement actions around off-channel communications might have been a bridge too far.
On September 24, 2024, SEC Commissioners Peirce and Uyeda released a statement titled “A Catalyst: Statement on Qatalyst Partners LP” in which they argue, under the standard applied by the SEC in a settled matter involving Qatalyst Partners, even well-intentioned firms could find themselves in the SEC’s enforcement queue time and again.
My writeup of the SEC’s case against Qatalyst Partners can be found here.
In their statement, Commissioner Peirce and Uyeda acknowledge the “use of off-channel communications – text messages, smartphone chat applications like WhatsApp, and personal email outside of firm-approved systems – is prevalent across the securities industry” while stating “it does not appear that firms have an achievable path to compliance.” They proceed to ask a number of detailed questions seeking to develop a pragmatic and privacy-respecting approach that enables firms and the SEC to have the records they need for compliance, examination, and enforcement at a reasonable cost.
The Commissioners’ statement is a step in the right direction and represents real awareness. The SEC could line its coffers with case after case involving off-channel communications. As the Commissioners point out “people are not perfect and so compliance will not be perfect” but that doesn’t mean we – industry and the SEC – should not attempt to improve.