Off-Channel Communications

Since last August, the Securities and Exchange Commission (SEC) has fined 32 firms over $439 million for what they call “off-channel communications.”

“Off-channel communications” typically refer to any communications between individuals involved in a securities transaction or business deal that occur outside of the officially regulated channels. These communications might include informal discussions, emails, text messages, or other forms of correspondence that are not properly documented or disclosed to the firm or to regulatory authorities.

The SEC is concerned about off-channel communications because they can potentially facilitate insider trading, market manipulation, or other illegal activities. By communicating outside of official channels, individuals may seek to gain an unfair advantage or manipulate the market in a way that is detrimental to other investors or the integrity of the financial system. No one at The Leaders Group would attempt to do any of those things, but the regulators assume the worst of everyone.

The SEC requires transparency and accountability in financial transactions to ensure fair and orderly markets. Failure to disclose off-channel communications or engaging in illicit activities through such channels can result in severe penalties, including fines, legal action, and even imprisonment. Therefore, the SEC closely monitors and investigates suspicious communications to maintain market integrity and investor confidence, which means The Leaders Group has to as well.

It is important to note that in each of the 32 cases, the off-channel communications at issue were conducted on the personal devices of the firm’s employees. In addition to creating record keeping and monitoring challenges and related examination risks—as outlined by the SEC in these and prior, similar proceedings—the use of personal devices for firm business raises complicated issues during regulatory investigations when responding to subpoenas and similar requests. This means that your personal phone and computer records can be requested and used against you. To prevent this from impacting any of us, we prohibit text messaging unless it is through MyRepChat or Redtail Speak and prohibit the use of any email address for securities business that is not archived through Global Relay for us.

Jane Riley

Chief Compliance Officer