Financial firms should see enforcement actions as learning opportunities. The Securities and Exchange Commission (SEC) and other regulatory bodies enforce steep fines and penalties to send a clear message and deter future violations. As a result? They expect firms within the industry to pay attention and adapt their compliance programs accordingly.
With that in mind, we’re continuing our blog series, “what went wrong” in which we’ll cover enforcement actions and what your firm can do to avoid similar enforcement actions.
In our previous blog post, we talked about a $79 million recordkeeping violation. Today, we’re focusing on an enforcement action regarding the SEC’s recordkeeping regulations and what broker-dealers and investment advisers can learn from this case of noncompliance.
The Case: A Violation of the SEC’s Recordkeeping Rule
On Feb. 9, 2024, the SEC announced charges against sixteen firms for recordkeeping violations. The SEC alleges that the 16 firms, including five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers, failed to maintain and preserve electronic communications.
The SEC alleges:
- The agency’s investigations uncovered pervasive and longstanding uses of unapproved communication methods, also known as off-channel communication, at all 16 firms.
- The broker-dealer firms admitted that, from at least 2019 to 2020, their employees communicated through personal texts about the business of their employers.
- The investment adviser firms admitted that their employees sent and received off-channel communications related to recommendations and advice given or proposed to be given.
- The firms didn’t maintain or preserve the substantial majority of these off-channel communications, which violates the SEC’s regulations.
- By failing to maintain and preserve required records, some of the firms might have deprived the SEC of the off-channel communications needed in various SEC investigations.
- The recordkeeping violations involved employees at multiple levels of authority, including supervisors and senior managers.
The firms admitted the facts set forth in their respective SEC orders, acknowledged their conduct violated the SEC’s recordkeeping rules, and agreed to pay a combined $81 million in civil penalties.
What Can Your Broker-Dealers and Investment Advisers do to Avoid Violating the SEC’s Recordkeeping Rule?
Here are some steps your firm can take to avoid making costly mistakes as it relates to the SEC’s recordkeeping rules:
- Establish a clear policy on approved communication methods for business purposes (e.g., email, secure chat platforms).
- Prohibit unapproved communication channels.
- Prohibit the use of personal communication channels (e.g., personal texts, emails) for discussing business matters.
- Educate employees on recordkeeping policies and the use of approved communication channels.
- Ensure the capture and preservation of all relevant communications, including electronic chats, text messages, voicemails, and social media communications.
- Regularly test and back up recordkeeping systems to ensure data integrity and accessibility.
- Have a clear process of reporting potential recordkeeping violations to the compliance team.
- Regularly review and update recordkeeping policies and procedures to comply with current SEC rules and industry best practices.
Now is the time to assess your firm’s compliance program to ensure it is fully equipped to prevent a recordkeeping violation – and automation might be the way to do it!
Recordkeeping Compliance with COMPLY
Recent SEC crackdowns highlight the crucial need for robust recordkeeping practices. Manually managing such diverse data streams is resource-intensive and error-prone, leaving firms vulnerable to violations.
COMPLY’s automated archiving and review solution empowers you to confidently navigate this complex landscape. Our platform seamlessly captures communications across all relevant sources, from email and social media to web chats and text messages. Advanced tools automatically flag potentially risky content based on pre-defined rules and keywords, streamlining review processes and ensuring comprehensive oversight.
By automating tedious tasks and mitigating human error, COMPLY delivers tangible benefits:
- Automatic capture and storing of client-facing communications from multiple sources, including emails, webpages, and social media platforms, including Facebook, LinkedIn, and Twitter.
- Increased efficiency, giving compliance teams more time to focus on strategic initiatives.
- A tamper-proof audit trail ensures accurate recordkeeping and simplifies regulatory inquiries.
Don’t leave your firm exposed to costly penalties and reputational damage. Partner with COMPLY and enjoy peace of mind knowing your recordkeeping practices are secure, efficient, and compliant.
Is your firm doing all it can to avoid a recordkeeping violation? Let’s find out.