January 12, 2022
On December 17, 2021, the SEC settled charges against a registered broker-dealer (Broker-Dealer) for certain recordkeeping failures in violation of Section 17(a) of the Exchange Act and Rule 17a-4 promulgated thereunder; and for failures to reasonably supervise its employees with a view to preventing or detecting certain of its employees’ aiding and abetting violations.
The SEC found that the Broker-Dealer violated Rule 17a-4(b)(4), which requires broker-dealers to create, and preserve in an easily accessible place, originals of all communications received and copies of all communications sent relating to the firm’s business. From at least January 2018 through at least November 2020, Broker-Dealer employees, including supervisors, communicated both internally and externally via personal text messages, WhatsApp messages, and through emails on their personal devices. These written communications related to the securities business of the Broker-Dealer and were not maintained or preserved by the Broker-Dealer.
The Broker-Dealer maintained policies and procedures designed to ensure the retention of business-related records, including retention of electronic communications. Its employees were advised that the use of unapproved electronic communications methods for business purposes, including on their personal devices, was not permitted. However, the Broker-Dealer failed to implement sufficient monitoring to ensure that its recordkeeping and communication policies were being followed. As a result, the Broker-Dealer failed to reasonably supervise its employees as required under the Exchange Act.
During the period in which the Broker-Dealer failed to maintain the required records relating to its business, the Broker-Dealer received and responded to SEC subpoenas for documents and record requests in numerous investigations. The SEC noted that the Broker-Dealer’s recordkeeping deficiencies impacted the SEC’s ability to carry out its regulatory functions and investigate potential violations of the federal securities laws; and that the SEC was often deprived of timely access to evidence and potential sources of information for extended periods of time and, in some instances, permanently.
The Broker-Dealer has admitted the facts in the Order and acknowledged its conduct violated federal securities laws. As a result of the above violations, the Broker-Dealer has undertaken certain remedial measures, including the retention of a compliance consultant, and has been ordered to pay a civil penalty of $125,000,000.
This action serves as a reminder for broker-dealers, investment advisers and other regulated entities of their recordkeeping and supervision responsibilities in connection with their employees’ use of electronic communications. These responsibilities include implementing sufficient monitoring procedures that are designed to ensure that existing policies are followed.
The SEC press release can be found here.
The Order can be found here.
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