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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