Senior staff at Blackstone, KKR, Apollo, Carlyle and Schwab used unauthorised messaging to bypass US rules on monitoring electronic communication, the Securities and Exchange Commission found.
Firms in question were found to have gone against their own recordkeeping requirements and that of the commission, under the Advisers Act, by failing to maintain and preserve their electronic communications.
In the majority of cases, these infractions were committed at a senior level.
Sanjay Wadhwa, acting director of the division of enforcement, commented: “In order to effectively carry out their oversight responsibilities, the Commission’s Examinations and Enforcement Divisions must, and indeed do, rely heavily on registrants complying with the books and records requirements of the federal securities laws. When firms fall short of those obligations, the consequences go far beyond deficient document productions; such failures implicate the transparency and the integrity of the markets and their participants, like the firms at issue here.”
Blackstone’s business divisions Alternative Credit Advisors, Management Partners and Real Estate Advisors have been hit with a US$12 million penalty, the largest of the group. “A Blackstone Alternative Credit Advisors senior managing director exchanged messages with multiple colleagues on an unapproved platform concerning proposed investment advice for a client. Similarly, a Blackstone Management Partners senior managing director exchanged messages with a colleague on an unapproved platform concerning proposed investment advice for a client,” the SEC alleged.
Kohlberg Kravis Roberts & Co also received a fine. The US$11 million penalty resulted from off-channel communications between colleagues and to external market participants, which included discussions on advice and recommendations. One unnamed partner was highlighted as a regular offender, communicating with other partners and senior personnel through non-approved platforms. This resulted in three partners altering or intending to alter their phone settings to ensure messages were deleted after 30 days.
Charles Schwab & Co was given a US$20 million penalty in response to off-channel communications around its broker-dealer business. Additionally, messages sent on firm-issued devices could not be monitored.
At Apollo Capital Management, messages related to recommendations, advice and orders were sent via non-approved platforms. “an Apollo partner exchanged a number of messages on an unapproved platform with Apollo colleagues about a proposed recommendation to increase a position for a client,” the SEC reported.
At Carlyle Investment Management, “a managing director affiliated with Carlyle Credit exchanged several messages with an insurance company regarding the disbursement of funds related to a transaction. In another example, a partner associated with Carlyle exchanged messages with another partner about the performance of a Carlyle investment vehicle.”
“A TPG Capital Advisors principal exchanged 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,” the SEC added.
The three firms were each given a US$8.5 million penalty.
Santander US Capital Markets’ US$4 million fine was prompted by off-channel communications by senior figures, including managing directors, to individuals both within and external to the company.
Wadhwa commented: “In today’s actions, while holding firms responsible for their recordkeeping failures, the Commission once more recognised and credited a registrant’s self-report, demonstrating yet again that there are tangible benefits to be gained from proactive cooperation.”
PTJ Partners self-reported its violations to the SEC, resulting in a reduced US$600,000 penalty. Violations included communications both between employees and with clients and external market participants. “PJT Partners’ employees responsible for supervising junior employees and their compliance with policies and procedures pertaining to off-channel communications themselves communicated off-channel using their personal devices. Many, but not all, of the sampled employees had begun a regular practice of forwarding off-channel communications to the firm’s systems by early 2022,” the SEC reported.
