(Article from Registered Funds Regulatory Update, July 2024)
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In a recent speech at the SEC Speaks 2024 conference, SEC Division of Enforcement Deputy Director Sanjay Wadhwa discussed the various factors the SEC is using to assess recent penalties for both off-channel communication and related recordkeeping violations and violations of the newly amended Marketing Rule.
Wadhwa stated that the following six key factors are being used by the Division to assess penalties in connection with its ongoing focus on off-channel communication and related recordkeeping violations: (i) the size of the firm, both in terms of revenue and number of SEC registrants employed; (ii) scope of violations; (iii) the firm’s efforts to comply with recordkeeping obligations; (iv) precedent; (v) self-reporting; and (vi) cooperation. He reported that the SEC issued 41 settlement orders against 60 firms for off-channel communication violations resulting in combined penalties of over $1.7 billion since December 2021. These penalties ranged from $2.5 million to $125 million.
Despite the wide-range in penalties, Wadhwa confirmed that each penalty is based on an individualized assessment of each firm. According to Wadhwa, this assessment includes consideration of the size of the firm in determining whether a penalty would act as a deterrent against future violations. In determining the breadth and depth of violations, he noted that the SEC considers the number of employees that engaged in off-channel communications as well as the number of violations. He noted that firms that have adopted technology or other solutions to comply with recordkeeping obligations may face reduced penalty amounts. He confirmed that precedent is used as a guide but is not a determinative factor. Finally, he said that the most likely factor to significantly lower the recommended penalty is whether the firm self-reported but that the SEC will also take into account the firm’s cooperation in the investigation.
With regards to Marketing Rule violations, Wadhwa reported that the SEC’s initiative to enforce compliance has resulted in penalties ranging from $175,000 to $50,00. He noted that the SEC is using the following five factors to assess penalties: (i) the firm’s regulatory assets under management; (ii) the firm’s regulatory history; (iii) whether the firm took remedial actions; (iv) the SEC’s intent to deter future activity; and (v) self-reporting and cooperation.
Wadhwa concluded by stating that the factors identified are generally relevant to any SEC investigation.
Sanjay Wadhwa, SEC Division of Enforcement Deputy Director, Speech, Remarks at SEC Speaks 2024 (Apr. 3, 2024), available at: https://www.sec.gov/news/speech/sanjay-wadhwa-sec-speaks-2024-04032024.