Securities Enforcement Roundup – January 2025

In this issue of our monthly Securities Enforcement Roundup, we highlight top securities enforcement developments and cases from January 2025.

In January 2025:

• The US Securities and Exchange Commission (SEC) announced the formation of a new Crypto Task Force that will seek to develop regulatory guidelines for the industry.
• The SEC settled charges for compliance failures relating to cash sweep programs.
• A broker-dealer settled charges with the SEC for Market Access Rule violations and failing to protect confidential subscriber trading information.
• The SEC settled charges with more than a dozen firms for recordkeeping violations in what we expect to be one of the last waves of its “off-channel communications” sweep.

SEC Launches New Crypto Task Force

On January 21, 2025, SEC Acting Chairman Mark T. Uyeda announced the formation of a new Crypto Task Force.[1] Led by Commissioner Hester M. Peirce, this initiative will be dedicated to developing a comprehensive and clear regulatory framework for crypto assets.

Signaling a departure from the previous administration’s approach to the regulation of the crypto industry, the SEC has stated that the task force will put the SEC “on a sensible regulatory path that respects the bounds of the law.”[2] Rather than “relying on enforcement actions” that often times “adopt[]novel and untested legal interpretations,” the task force will work to “draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.”

Commissioner Peirce provided additional insight regarding the Crypto Task Force in a statement issued on February 4,[3] where she characterized the Commission’s history of crypto regulation as “marked by legal imprecision and commercial impracticality.” Among other things, Commissioner Peirce’s statement includes a list of issues the task force is addressing including, for example, the status of crypto assets under securities laws, their paths to registration and the scope of the SEC’s jurisdiction over them, possible updates to the special-purpose broker dealer no-action statement, and custody solutions for investment advisers.

Commissioner Peirce also raised the possibility of recommending “Commission action to provide temporary prospective or retroactive relief for coin or token offerings for which the issuing entity or some other entity willing to take responsibility provides certain specified information, keeps that information updated, and agrees not to contest the Commission’s jurisdiction in the event of a case alleging fraud in connection with the purchase and sale of the asset.” She closed her statement by welcoming engagement and input from the public regarding these topics and other issues the task force is considering.

SEC Settles Charges for Compliance Failures Relating to Cash Sweep Programs

The SEC recently settled charges for failures to adopt and implement reasonably designed written policies and procedures regarding their cash sweep programs. According to the SEC, the settling registrants offered bank deposit sweep programs (BDSP) as the only cash sweep product option for most of their advisory clients, despite offering other cash products outside of the cash sweep program, such as money market funds, treasuries, and CDs.

The SEC alleged that the BDSP interest rates, which were set by the investment advisers (or their affiliates), were lower than the interest rates provided by other cash products offered by the investment advisers, and that the investment advisers failed to adopt and implement reasonably designed policies and procedures that considered (1) their clients’ best interests when evaluating and selecting which cash sweep program options were made available to clients, and (2) the duties of financial advisers as to the allocation and management of client cash in advisory accounts.

Without admitting or denying the SEC’s findings, the settling parties agreed to collectively pay civil penalties of $60 million to settle the SEC’s charges. Notably, there was no ordered disgorgement. In addition, both Commissioners Peirce and Uyeda voted against approving these settlements, suggesting that there are differing views within Commission regarding these actions.

SEC Settles Charges with Broker-Dealer for Violating Market Access Rule and Failing to Protect Confidential Subscriber Trading Information

On January 10, 2025, a broker-dealer operating multiple alternative trading systems (ATS) settled charges by the SEC that it (1) violated Market Access Rules, (2) failed to protect confidential subscriber trading information, and (3) made inaccurate disclosures about the protection of subscriber information.[4]

As an ATS operator, the broker-dealer was required to have a system of controls and procedures to prevent the entry of orders that would exceed appropriate credit thresholds for its customers. The SEC alleged that the broker-dealer failed to perform appropriate reviews of its ATS’ non-broker-dealer customers’ creditworthiness when setting these pre-trade credit thresholds, and instead often set the limit at a default of $1 billion. As a result, alerts based on these thresholds that were intended to flag when a customer was close to reaching its credit threshold were not effective.

In addition, the SEC charged the broker-dealer with failing to adequately safeguard confidential subscriber trading information, including because it failed to follow its own procedures, which required that managers with access to confidential data provide explanations and certifications regarding the use of that data, and limit the employees who were permitted to access such confidential data.[5] While there was no indication that confidential subscriber trading information was improperly shared outside of the firm, the SEC alleged that the broker-dealer nonetheless failed to comply with Rule 301(b)(10) by failing to adequately protect this information. The SEC further alleged that the broker-dealer made material misrepresentations to customers about its market access controls and to subscribers about its compliance with ATS regulations and ATS safeguards for subscriber confidential trading information.[6]

Without admitting or denying the SEC’s findings, the broker dealer agreed to pay a $5 million civil penalty to settle the SEC’s charges. In reaching this settlement, the SEC considered certain remedial efforts by the broker-dealer, including engaging a compliance consultant and self-reporting certain conduct.

SEC Announces More Off-Channel Communications Settlements

A week before the change in the US administration, the SEC announced settled charges with more than a dozen firms, including investment advisers and broker-dealers, for failing to maintain and preserve electronic communications in violation of the federal securities recordkeeping laws. As discussed in our prior LawFlash and in recent Enforcement Roundups (see our September 2024 and August 2024 publications), the SEC has been conducting a sweep of Wall Street’s “off-channel” communications—such as text messages, iMessages, and WhatsApp messages—sent and received by employees of registered entities using their personal devices since December 2021.

While these settlements add to the seemingly ever-growing list of off-channel settlements, given the new administration and criticisms expressed by Republican-appointed SEC Commissioners, we anticipate such standalone off-channel communications charges to sunset going forward. For example, on September 24, 2024, Commissioners Peirce and Uyeda dissented from an off-channel communications enforcement action by stating that even though firms may take reasonable steps to address off-channel communications, such firms may still not find themselves in proper compliance.[7]

Indeed, the comparatively smaller civil penalties and the absence of any requirement to retain independent compliance consultants (ICCs) in these later actions suggests that the firms may have leveraged the change in administration to secure more favorable settlement terms.