Texting Crackdown a 'Cash Cow' for the SEC: Commissioner Peirce

The Securities and Exchange Commission’s crackdown on texting and the use of unauthorized messaging apps by firms has become a “cash cow” for the agency, Republican SEC Commissioner Hester Peirce told lawmakers Tuesday.

The agency should have taken a regulatory approach instead of levying fines, Peirce maintained, as no fraud has been found.

In an exchange with Rep. Ann Wagner, R-Mo., during an SEC oversight hearing held Tuesday by the House Financial Services Committee, Wagner said that the SEC has been “extracting huge settlements for enforcement cases” relating to off-channel communications, citing the more than $3 billion in total fines assessed as part of the overall sweep.

Wagner probed Peirce on whether any fraud or customer harm has been found in any of the actions levied to date, and asked what the agency is “basing” its fines on.

“It certainly has become a cash cow for the SEC,” Peirce responded. “The typical case has not been based on fraud or any evidence of a problem other than a recordkeeping problem. Now, that’s a serious problem. But I think we need to address it, not through enforcement first, but through regulatory work that involves working with people on the outside, the industry and so forth, to try to figure out how to make these rules workable and also effective for our regulators.”

Tuesday morning, the SEC continued its crackdown on texting and the use of unauthorized messaging apps by ordering 11 firms to pay a combined $88 million for widespread and longstanding failures to maintain and preserve electronic communications.

Peirce and Uyeda Dissent

Peirce and the other Republican SEC commissioner, Mark Uyeda, issued a dissent the same day stating that “the use of off-channel communications — text messages, smartphone chat applications like WhatsApp, and personal email outside firm-approved systems — is prevalent across the securities industry. We have an industry-wide problem that we will not solve through enforcement.”

Over the last several years, Peirce and Uyeda wrote, “off-channel communications cases have become more prevalent on the Commission’s enforcement docket. We have struggled with these cases. While we supported many of them initially, it was not without deep reservations.”

Recently, the two continued, “we have objected to the penalties and undertakings in most of these cases,” noting that the case Tuesday against Qatalyst Partners LP ”illustrates and confirms the reason for our reservations: It does not appear that firms have an achievable path to compliance.”

Under the standard applied in that case, “even well-intentioned firms could find themselves in the Commission’s enforcement queue time and again. Qatalyst has been working to address the off-channel issue for at least sixteen years,” Peirce and Uyeda wrote.

Said Peirce and Uyeda: “If we assess reasonableness based on whether policies and procedures always are being followed, firms will never escape our enforcement net. People are not perfect and so compliance will not be perfect — even at a firm that tries as hard as Qatalyst. Firing up our enforcement machinery every couple years to haul the industry in for headline-making penalties will not make people perfect, so firms will continue to discover violations of firm policies. We cannot enforce to perfection, but there is a way to achieve better compliance.”

SEC Enforcement Director Gurbir Grewal noted in announcing the fines Tuesday that despite recordkeeping failures “that involved communications by senior leadership and persisted after our first recordkeeping matters were announced in 2021, Qatalyst took substantial steps to comply, self-reported, and remediated and, therefore, received a no-penalty resolution.”