SEC Charges 11 Firms with Widespread Recordkeeping Failures

Who may be interested: Registered Investment Advisers, Broker-Dealers, Registered Investment Companies, Boards of Directors

Quick Take: The SEC recently settled charges against ten broker-dealers and one dually registered investment adviser and broker-dealer for alleged widespread recordkeeping deficiencies related to the firms’ and their employees’ failures to maintain and preserve copies of electronic communications. The SEC highlighted in its press release that it has now brought 30 enforcement actions and ordered over $1.5 billion in penalties relating to recordkeeping violations, and emphasized the importance of self-reporting and remediating recordkeeping deficiencies.

The SEC Orders found that employees at the firms, including senior employees with high levels of authority, routinely used various “off-channel” messaging applications, and internal and external text messages, on their personal devices to discuss business matters. 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 and the Advisers Act. The firms were also charged with failing to reasonably supervise their employees with a view to preventing and detecting such violations.

The firms admitted the facts set forth in their respective SEC Orders and agreed to cease and desist from further violations of the recordkeeping rules, retain compliance consultants to review their policies and procedures, and pay combined civil penalties of $289 million. Several of the firms also settled charges with the CFTC for related conduct.

See Seward & Kissel’s client alert covering the enforcement actions here.

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 publication covering the SEC’s prior enforcement actions involving off-channel communications here.

The SEC’s press release is available here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.