The Power of Self-Reporting: The Curious Case of Huntington and its (Rather Reasonable) SEC Fine

The SEC crackdown on recordkeeping violations marches on. The regulator has recently reported somewhat of a fine ‘frenzy’, hitting sixteen firms with hefty penalties totaling over $81 million for widespread recordkeeping failures related to the use of unapproved communication channels, primarily text messaging.

The latest fines wouldn’t have come as a surprise to those in the financial services sector. The SEC’s recent actions simply represent the latest salvo in its ongoing campaign against recordkeeping violations. In particular, they are focusing on bankers using messaging apps that are not monitored by their firms – such as WhatsApp and iMessage – to conduct business. Firms that do not capture and archive these communications are in breach of compliance with recordkeeping regulations designed to protect against wrongdoings in financial advice.  

Since late 2021, the SEC and CFTC have dished out more than $2.7 billion in penalties for similar offenses, highlighting the pervasiveness of the issue and the regulators’ unwavering commitment to enforcing compliance. These hefty fines are a stark reminder for all financial institutions: no firm is immune to scrutiny, and the consequences of non-compliance can be severe. 

But amidst the recent penalties, one name stood out: The Huntington Investment Company. While its peers faced fines ranging from $8 million to $16.5 million (and previous fines reaching $200m each), Huntington managed to secure a significantly smaller penalty of just $1.25 million. 

The Multi-Million Dollar Question: How Did Huntington Do It? 

The answer to how Huntington achieved this was spelled out by the SEC in its press announcement. Gurbir Grewal, Director of the SEC’s Division of Enforcement, stated: “One of these orders is not like the others: Huntington’s penalty reflects its voluntary self-report and cooperation.”

His statement underscores a key takeaway: proactive engagement and cooperation with regulators can significantly impact the outcome of investigations and enforcement actions.

The settlement agreement between Huntington and the SEC highlighted various remedial actions taken by the firm, including updates to recordkeeping policies and procedures, and enhanced supervisory practices. Notably, the firm introduced a solution for the preservation of communications. These measures, disclosed after an internal investigation and in collaboration with the SEC, exemplify the ‘reasonable steps’ expected by regulators to address such issues preemptively.

Huntington doesn’t stand alone as an example of the benefits of self-reporting. In 2023, HSBC Securities and Scotia Capital were fined $15m and $7.5m respectively by the SEC. These were reduced fines because the firms each self-reported their recordkeeping misdeeds. In a statement about the fines, Grewal stated: “Both HSBC and Scotia Capital self-reported and self-remediated their recordkeeping violations, and the reduced penalties in these cases reflect their efforts and cooperation. As we continue our efforts to ensure compliance with the Commission’s essential recordkeeping requirements, we encourage other firms to take note and likewise self-report.” 

These firms’ playbooks serve as a blueprint for navigating regulatory scrutiny. Their actions highlight the tangible benefits of self-reporting: 

• Financial Advantage: A significantly reduced penalty compared to non-reporters. 
• Reputational Safeguard: Prompt action minimized potential damage, showcasing their commitment to ethical conduct. 
• Streamlined Process: Cooperation likely expedited the investigation, saving time and resources for both parties. 
• Industry Leadership: Their example encourages others to embrace self-reporting and proactive compliance. 

The Off-Channel Conundrum: Why Both Violations and the SEC Persist  

The SEC crackdown has exposed the worst kept secret in finance – despite explicit bans by institutions, there is still widespread adoption of off-channel communication tools by employees. A recent survey conducted by LeapXpert and Shield on the state of mobile compliance revealed that 73% of financial institutions lack confidence in bans on employees’ use of unapproved communication channels.

If channels are prohibited by their companies, why are employees still using them? New-age communication apps are an inherent part of the way both employees and consumers interact daily. Banning them makes communication with clients cumbersome, stopping the normal flow of work and forcing unwilling people onto alternative channels.  

Clients increasingly expect seamless, personalized communication across various channels – the same LeapXpert survey found that two-thirds of respondents cite clients as a key initiator of mobile messaging conversations – and employees often resort to off-channel tools to provide responsive and convenient service, even if it means skirting compliance protocols. 

Why then is the SEC so intent on cracking down on this practice? The SEC’s Grewal explains part of what makes off-channel communication so problematic in the eyes of regulators. Referring to the announcement of the $1.1 billion in fines against the 16 other firms in 2022, he stated: “Today’s actions – both in terms of the firms involved and the size of the penalties ordered – underscore the importance of recordkeeping requirements: they’re sacrosanct. If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened.”  

Off-channel communication channels that operate outside the purview of official corporate recordkeeping systems make it difficult for the SEC to monitor potential misconduct, and this increases the potential for market manipulation, insider trading, or fraudulent activities. The widespread use of off-channel communication can also erode public trust in the financial markets and create an environment where investors feel information is not being disseminated fairly and transparently. This can ultimately harm market stability and investor confidence. 

It’s important to note that the SEC isn’t advocating for use of any specific app or channel. Nor are they forbidding certain channels. The SEC requirement is that any channel that is used for business-related communications must be monitored with all messages being captured, archived, and retained for easy access. 

Proactive Strategies for Taming the Off-Channel Beast: Be Ready, Not Reactive 

The SEC crackdown on off-channel communication violations serves as a stark reminder for financial institutions: burying your head in the sand is no longer an option. Instead, a proactive approach that acknowledges the reality of employee behavior while prioritizing compliance is key to navigating this complex landscape. Here’s how:

• Become a Policy Powerhouse: Revamp and fortify your communication policies. Clearly define acceptable channels for business use, outline consequences for non-compliance, and emphasize employee responsibilities for data preservation.  
• Ensure Enforcement with Bite: Don’t let policies gather dust. Implement robust monitoring and enforcement mechanisms to ensure adherence. This should involve regular audits, targeted training for employees who frequently slip up, and clear disciplinary measures for violators.  
• Surf the Tech Wave: Don’t fight the tide of technological advancements. Instead, harness their power for good. Explore and invest in technology solutions that capture and preserve communications across various platforms, including unofficial ones. Look for features like secure archiving, keyword search, and eDiscovery capabilities to make compliance efforts efficient and proactive. 
• Champion Transparency: Foster a culture of openness and encourage employees to report potential violations without fear of retribution. Remember, early detection and self-reporting can significantly reduce penalties, as seen in the Huntington case. 
• Adopt a Self-Reporting Strategy: Don’t wait for the SEC to come knocking. If you discover non-compliance, go to the regulators proactively. Self-report any violations, demonstrate a clear remediation plan, and showcase the steps already taken to address the issue. Remember, cooperation goes a long way in the eyes of the SEC. 

The Ultimate Protection: Turn Off-Channel into On-Channel 

While being proactive and engaging in self-reporting are crucial, battling off-channel communication can be like fighting a wildfire with a bucket of water – an activity that is largely unnecessary when technology is available to eliminate unmonitored channels almost entirely. Instead of a futile struggle, multi-channel communication platforms offer a powerful solution to bring off-channel communication into the fold and achieve regulatory compliance. Multi-channel platforms integrate with various communication channels, including unofficial ones, capturing and securely storing all business-related conversations. 

By implementing a multi-channel communication platform, financial firms can: 

• Gain control over off-channel communication: No more blind spots, no more compliance risks. 
• Improve regulatory compliance: Meet your obligations and avoid costly penalties. 
• Boost employee productivity: Streamline communication and collaboration across channels. 
• Enhance data security: Protect sensitive information with robust security features. 
• Build a culture of compliance: Foster transparency and accountability within the organization. 

LeapXpert: Your Multi-Channel Partner 

Implementing multi-channel communication strategies can seem daunting, but with the right technology partner, it becomes a smooth journey. With the LeapXpert Communications Platform, you get: 

• Full Text-Message Integration: No matter your device policy (personal or corporate), LeapXpert ensures seamless messaging integration, maintaining a compliant and unified experience. 
• Multi-Channel Management: Manage multiple channels, including voice and messaging, seamlessly, all under one identity, offering flexibility and convenience. 
• Compliance Assurance: LeapXpert ensures your communication choices adhere to regulations, with comprehensive record keeping for compliance purposes. 
• Data Governance and Security: LeapXpert ensures data governance and security with data-loss protection, antivirus/antimalware and role-based access controls. 
• Field-proven, Enterprise Grade Solution:  LeapXpert offers carrier-grade availability, 24/7 support, and a rich partner ecosystem with the largest install base comprising hundreds of thousands of users in 47 countries.

Don’t let “off-channel” communication become a compliance headache. Partner with LeapXpert and unlock the power of multichannel communication to create a seamless, efficient, and compliant communication ecosystem for your organization. Remember, proactive solutions are always better than reactive measures. 

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