(Article from Registered Funds Regulatory Update, October 2024)
For more information, please visit the Registered Funds Resource Center.
The SEC recently settled charges against twenty-six broker-dealers, investment advisers, and dually-registered firms for recordkeeping deficiencies related to the firms’ and their employees’ failure to maintain and preserve copies of electronic communications, including as a result of the use of personal devices in connection with firm business, in violation of the recordkeeping provisions of the federal securities laws.
According to the Orders, during the relevant period, the firms’ employees, including senior employees, routinely conducted business through various off-channel messaging applications, including personal text messages and other text messaging platforms, such as WhatsApp, without maintaining or preserving the substantial majority of these off-channel written communications in violation of the federal securities laws. The Orders stated that the failures were firm-wide and involved employees at various levels of authority, including supervisors and senior managers. The Orders also stated that during this time, most of the firms received and responded to SEC subpoenas for documents and records requested in several SEC investigations such that these failures likely impacted the SEC’s investigations and ability to carry out regulatory functions. While a few of the firms self-reported their violations, the Staff uncovered the majority of the firms’ misconduct after commencing a risk-based initiative to investigate the proper retention of business-related communications via personal devices.
Each firm was charged with violating certain recordkeeping provisions of the Advisers Act, the Exchange Act, or both, as applicable, and with failing to reasonably supervise with a view to preventing and detecting those violations. Admitting the SEC’s facts and acknowledging that their conduct violated the recordkeeping provisions of the federal securities laws, the firms agreed to, among other things, (i) cease-and-desist from future violations of the relevant recordkeeping provisions, and (ii) retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures. One firm did not receive the order under (ii) because it had retained an independent compliance consultant prior to the SEC’s examination. The firms also consented to censures and civil monetary penalties totaling a combined amount of over $392 million (with individual penalties ranging from $400,000 to $50 million) and have begun implementing improvements to their compliance policies and procedures to address the violations. Notably, the Staff emphasized that self-reporting was a significant factor considered in setting the firms’ penalty amounts, with those firms that self-reported their violations ultimately paying “significantly lower” civil penalties.
The SEC continues to focus on off-channel communications and violations of the recordkeeping requirements of the Advisers Act, the Exchange Act, or both, as applicable, most recently settling charges against another eleven firms for their and their personnel’s “widespread and longstanding failures…to maintain and preserve electronic communications” in violation of the federal securities laws. The eleven firms agreed to pay combined civil penalties of over $88 million and each of the firms were censured and ordered to cease and desist from future violations of the recordkeeping provisions.
Litigation Rel. No. 2024-98, Twenty-Six Firms to Pay More Than $390 Million Combined to Settle SEC’s Charges for Widespread Recordkeeping Failures, (Aug. 14 2024), available at: https://www.sec.gov/newsroom/press-releases/2024-98.
Litigation Rel. No. 2024-144, Eleven Firms to Pay More Than $88 Million Combined to Settle SEC’s Charges for Widespread Recordkeeping Failures, (Sept. 4 2024), available at: https://www.sec.gov/newsroom/press-releases/2024-144.