SEC Fines Twenty-Six Firms for Recordkeeping Failures in Latest Off-Channel Communications Sweep

Who may be interested: Investment Advisers; Broker-Dealers; Registered Investment Companies

Quick Take: The SEC settled charges against twenty-six firms, including three investment advisers, eleven broker-dealers, and 11 dual-registered entities, for widespread recordkeeping deficiencies related to the firms’ and their employees’ failure to maintain and preserve copies of electronic communications. These collective enforcement actions are the latest in the SEC’s sweep of off-channel communications recordkeeping violations.

The SEC’s orders (the “SEC Orders”) found that employees at the firms, including senior employees, were routinely communicating through various off-channel messaging applications to discuss business matters of the firms, with respect to the broker-dealers, and recommendations made or proposed to be made and advice given or proposed to be given, with respect to the investment advisers. Records of these communications often were not maintained or preserved by the firms, which, the Orders noted, likely deprived the SEC of relevant communications in various SEC investigations.

The SEC Orders found that, as a result of such conduct, the firms violated their own internal policies and procedures, and applicable recordkeeping rules under the Exchange Act, the Advisers Act, or both. The SEC also charged the firms with failing to reasonably supervise their employees with a view to preventing and detecting such violations.

The firms admitted to the facts set forth in their respective SEC Orders and agreed to cease and desist from further violation of the recordkeeping rules under the Exchange Act and the Advisers Act; retain independent compliance consultants to review their policies and procedures; and pay combined civil penalties totaling $392.75 million.

The SEC Orders also noted that three of the firms self-reported their violations and, as a result, paid lower civil penalties than they otherwise would have. The self-reporting firms paid civil penalties of $5.5 million, $4.5 million and $1.6 million, respectively.

For further discussion of how firms can mitigate risks presented by off-channel communications, see Seward & Kissel’s webinar on the topic here. See also Seward & Kissel’s publications covering the SEC’s prior enforcement actions involving off-channel communications here, here and here.

The SEC’s press release announcing the charges can be found here.