Hilltop Securities and some other firms that settled with the Securities and Exchange Commission as part of its off-channel communications enforcement sweep have sent the regulator a message of their own: unequal treatment isn't fair.
That was the central theme of briefs in support of 10 separate Jan. 30 motions filed with the SEC by law firm Sidley Austin on behalf of Hilltop as well as Oppenheimer & Co.; Robert W. Baird & Co.; Piper Sandler & Co.; Raymond James & Associates.; Key Investment Services and KeyBanc Capital Markets; Truist Securities, Truist Investment Services, and Truist Advisory Services; LPL Financial; Osaic Services and Osaic Wealth; and Apex Clearing Corp.
In largely identical briefs, Hilltop — a municipal investment bank and wealth advisory firm — and the other firms said that more recent SEC off-channel communications settlements eliminated "certain costly and burdensome undertakings and compliance requirements" that were imposed on them.
"The Commission's most recent off-channel settlements applied materially different undertakings to similarly situated firms as part of the same enforcement sweep," said David S. Petron, a partner at Sidley, in a statement regarding the Jan. 30 motions. "Accordingly, multiple firms are requesting the Commission equalize the undertakings with the new settlements as a matter of fairness."
Hilltop was among 26 firms that agreed to pay civil penalties collectively totaling more than $390 million to settle SEC charges for widespread recordkeeping failures, according to an Aug. 14, 2024 SEC press release. Hilltop was among a small number of firms that self-reported their violations and consequently would "pay significantly lower civil penalties than they would have otherwise," according the release, which said Hilltop had agreed to pay a $1.6 million penalty.
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"On the same day the Commission issued the order, it issued substantially similar orders instituting settled administrative actions for materially similar violations of the same recordkeeping provisions of the federal securities laws against multiple other firms that are registered with the Commission as broker-dealers or dually registered with the Commission as broker-dealers and investment advisers," Hilltop's brief said.
As with the order pertaining to Hilltop, each of the other orders was issued in connection with the SEC's "industry-wide initiative related to 'off-channel' communications, and each ordered compliance with undertakings that were substantially uniform to the Ordered Undertakings imposed on Hilltop pursuant to the Order," the brief said.
"The consistent treatment of all these firms was intentional," Hilltop's brief said. "Between 2022 and the end of 2024, the Commission instituted settled enforcement actions against 90 broker-dealers or dually registered broker-dealer/investment advisers as part of its off-channel communications initiative."
The settled orders issued in relation to the initiative described in nearly uniform language similar violations by each firm, Hillside's brief said, adding that "the orders issued during that period also imposed a substantially uniform set of undertakings on each firm…"
However, following what had been its uniform approach to off-channel communication enforcement for more than two years against dozens of firms, the SEC switched course with orders on Jan. 13 instituting settled administrative proceedings against three broker-dealers and a dually registered broker-dealer/ investment adviser, the brief said.
The January orders "took a materially different approach to materially similar violations of the same provisions of the federal securities laws by similarly situated firms by eliminating certain costly and burdensome undertakings and compliance requirements," Hilltop's brief said, adding that the orders "did so in two principal ways."
First, the scope of undertakings that were enumerated in the January orders "is significantly more tailored and less demanding than the undertakings in prior orders," the brief said. Unlike the earlier orders, the January orders didn't require firms to hire an independent compliance consultant and also didn't require the independent consultant to undertake a multi-year review of recordkeeping practices and policies.
In addition, the more recent orders didn't require preparation of multiple reports to be submitted to SEC staff and also didn't require firms to "prospectively report relevant disciplinary actions promptly to the Commission staff," the brief said.
Secondly, unlike the previous settlements, "the ordering clauses of the January 2025 Orders did not order compliance with the enumerated undertakings," Hilltop's brief said. Because the more recent orders didn't order compliance with their enumerated undertakings, they didn't require the settling broker-dealers to submit a full application for continuing Financial Industry Regulatory Authority membership – an MC-400A Application – which was something Hilltop and other firms with ordered undertakings were mandated to do, the brief said.
"Approval of the MC-400A Application in turn leads to the mandatory imposition by FINRA of a plan of heightened supervision on each firm subject to ordered undertakings — while those broker-dealers with January 2025 orders will not have to file a MC-400A Application, and in turn will not be subject to any heightened supervision plan or years of continuing additional oversight by FINRA," Hilltop's brief said.
The heightened supervision plans require "costly and burdensome training, disclosures, and recordkeeping not otherwise required by the Commission's undertakings, with ongoing examination and supervision by FINRA for a period of six additional years," the brief said.
"As a result, Hilltop is subject to ongoing sanctions and attendant collateral consequences that flow from the sanctions imposed by the order — consequences that are significantly more severe and costly than those that the Commission most recently determined were appropriate in this context, as demonstrated by the January 2025 orders," Hilltop's brief said.
The SEC's Enforcement Division was ordered to file its response by Feb. 13, the order shows.
The SEC declined to comment beyond its public filings.
