SEC Settles Charges with Adviser for Recordkeeping Violations and Staff Lays Out Factors Considered in Determining What Penalties to Recommend for Off-Channel Communications Violations

Who may be interested: Investment Advisers, Broker-Dealers

Quick Take: The SEC settled charges against an investment adviser for widespread recordkeeping deficiencies related to the adviser’s failure to obtain, maintain and preserve copies of its employees’ off-channel electronic communications. Since 2021, the SEC has charged nearly 60 firms – including broker-dealers and their affiliated advisers as well as dually registered firms – with recordkeeping violations relating to off-channel communications. This enforcement action represents the first proceeding against a standalone investment adviser relating to off-channel communications practices. Separately, Deputy Director of the SEC’s Division of Enforcement, Sanjay Wadhwa, outlined the factors the staff considers in determining appropriate penalties for violations related to off-channel communications. 

The SEC’s order found that employees of the investment adviser, including supervisors and senior officers, used “off-channel” messaging applications to discuss business matters in violation of the adviser’s policies and procedures. The communications related to the adviser’s business and were participants included the adviser’s senior executive officers, managing directors, employees, fund investors, and other financial-industry participants. Although the adviser had a policy permitting it to access and monitor employees’ devices, the adviser did not do so. Further, several of the adviser’s senior officers had their devices set to automatically delete messages after 30 days, which prevented the adviser from recovering certain messages that it was required to keep. During the time frame in which messages were not obtained and retained, the adviser responded to voluntary inquiries and subpoenas seeking communications by its personnel.

The SEC’s order found that the adviser violated Section 204 and Rule 204-2 (recordkeeping), Section 206 and Rule 206(4)-7 (compliance policies and procedures) and Section 204A and Rule 204A-1 (codes of ethics). The SEC also found that the adviser failed to reasonably supervise its employees and prevent them from aiding and abetting the adviser’s violations. The adviser agreed to pay a $6.5 million penalty and retain independent compliance consultants to conduct a comprehensive review of its policies and procedures.

Deputy Director Wadhwa explained that in determining penalties for recordkeeping violations related to off-channel communications, the SEC looks at a number of factors, including:

• the size of the firm;
• the scope of the violations;
• the firm’s efforts to comply with its recordkeeping obligations;
• precedent settlements as a guide to recordkeeping violations;
• whether the firm self-reported; and
• the firm’s cooperation with the staff.

The SEC’s Order settling charges against the investment adviser can be found here. Deputy Director Wadhwa’s speech can be found here.