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 cover recent enforcement actions and what your firm can do to avoid the same mistakes.
In our previous enforcement action blog post, we talked about five investment advisers charges for violating the SEC’s custody rule, totaling more than $500,000 in penalties. Today, we’re focusing on charges the SEC filed against five broker-dealers, three dually registered broker-dealers and investment advisers and two affiliated investment advisers for failing to comply with the SEC’s recordkeeping rule and what firms can learn from these charges.
The case: Violations of the SEC’s recordkeeping rule
On Sep. 29, 2023, the SEC charged ten firms with widespread recordkeeping failures.
According to the SEC:
- The SEC’s investigations uncovered pervasive and longstanding off-channel communications at all 10 firms.
- The broker-dealer firms admitted that, from at least 2019, their employees communicated through personal text messages about the business of their employers.
- The investment adviser firms admitted that their employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given.
- The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws.
- By failing to maintain and preserve required records, certain of the firms likely deprived the SEC of these off-channel communications in various SEC investigations.
- The failures 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 that their conduct violated recordkeeping provisions of the federal securities laws and agreed to pay combined penalties of $79 million. It’s worth noting that the firm that self-reported had a significantly lower monetary penalty. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said “There are real benefits to self-reporting, remediating and cooperating.”
The firms also began implementing improvements to their compliance policies and procedures to address these violations.
“Each of the firms were ordered to cease and desist from future violations of the relevant recordkeeping provisions and was censured. Furthermore, the firms committed to engaging independent compliance consultants. These consultants will conduct thorough reviews, including an examination of policies and procedures concerning the retention of electronic communications on personal devices. The consultants will also assess the frameworks in place for dealing with non-compliance by employees with these established policies and procedures.”
What can firms do to avoid violating the SEC’s recordkeeping rule?
Here are some steps your firm can take to avoid violating the SEC’s recordkeeping rule:
- Develop comprehensive and clear recordkeeping policies that align with the SEC’s regulations – and ensure that they cover electronic communications and off-channel discussions.
- Regularly train employees about recordkeeping requirements, emphasizing the importance of compliance with SEC rules.
- Stay updated on regulatory changes and communicate them effectively.
- Invest in advanced technology solutions for archiving and monitoring electronic communications. These tools should enable efficient retention, retrieval and supervision of electronic records.
- Implement systems to monitor and capture off-channel communications, including personal devices and messaging apps. MyRIACompliance® Communications Archiving and Review ensures that business-related discussions are captured and stored appropriately.
- Encourage employees at all levels to adhere to recordkeeping policies and create a sense of responsibility for maintaining accurate and complete records.
- Regularly audit your firm’s compliance program to ensure compliance with recordkeeping rules.
- Periodically review and update policies to address emerging risks and changes in business practices.
- Establish a mechanism for employees to report potential recordkeeping violations.
- Consider reaching out to compliance consultants to conduct thorough reviews of your firm’s recordkeeping practices.
- Stay abreast of regulatory developments and industry best practices. Be adaptive to changes in technology and business practices, ensuring that recordkeeping policies remain effective in the evolving landscape.
Complying with COMPLY
Firms should take this recent slew of charges as a wake-up call to revisit their compliance programs. Compliance teams can take several steps, like conducting regular audits of their compliance programs, to avoid violating the SEC’s recordkeeping rule. Firms might also find automation helpful in maintaining their compliance programs and avoiding violations.
COMPLY offers tailored services to meet each firm’s specific needs, considering their size, complexity and risk profile in order to help firms mitigate compliance risks effectively. By utilizing COMPLY’s consulting services and solutions, investment advisers and broker-dealers can ensure they are prepared for regulatory changes, maintain updated policies and procedures and minimize the risk of violations.