On September 17, 2024, the U.S. Securities and Exchange Commission (SEC) imposed fines totaling more than $1.3 million on 12 municipal advisors for failing to maintain records of electronic communications, including text messages. This action is part of the SEC's ongoing efforts to address "off channel" communications in the financial industry.
The Securities and Exchange Commission, established in 1934 following the Wall Street Crash of 1929, has been intensifying its focus on modernizing oversight of digital communications in recent years. This latest enforcement action highlights the growing importance of preserving electronic communications in the financial sector, a practice that has become increasingly crucial since the 2008 financial crisis.
The 12 firms were found to have violated record-keeping provisions of the Securities Exchange Act and rules set by the Municipal Securities Rulemaking Board (MSRB). The MSRB, established by Congress in 1975, plays a vital role in regulating municipal securities activities.
Among the largest fines imposed were $324,000 against Kaufman Hall & Associates, together with Ponder & Co; $250,000 against PFM Financial Advisors; and $250,000 against Specialized Public Finance. Zions Public Finance Inc, a subsidiary of Utah-based Zions Bancorporation, agreed to pay $47,000. Zions Bancorporation, founded in 1873, is headquartered in Salt Lake City.
The SEC's Deputy Chief of Enforcement, Rebecca Olsen, emphasized the importance of self-reporting, stating:
"Firms that believe their practices do not comply with the securities laws are encouraged to self-report to the SEC's Enforcement staff."
This approach aligns with the SEC's efforts to promote transparency and accountability in financial markets, which have been key objectives since the establishment of its enforcement division in 1972.
The firms admitted that staff at multiple levels, including supervisors, failed to preserve communications related to municipal advisory work as required by law. This admission underscores the widespread nature of the issue within these organizations and the need for improved compliance measures.
Municipal advisors play a critical role in providing advice to state and local governments about municipal financial products and the issuance of municipal securities. These securities are debt instruments issued by various governmental entities to fund public projects and operations.
As the use of text messaging for business communications has increased significantly in recent years, financial institutions face growing challenges in maintaining proper records. The SEC's action serves as a reminder of the importance of adapting record-keeping practices to evolving communication technologies.
The attorneys representing the settling firms did not provide immediate comments on the matter. This enforcement action continues the SEC's series of measures addressing off-channel communications, reflecting the regulator's commitment to ensuring compliance with securities laws in an increasingly digital financial landscape.