United States: SEC Charges Ten Firms With Recordkeeping Failures And Fines Totaling $79 Million

The SEC's investigations have uncovered pervasive off-channel communications at almost all levels of seniority and management in the impacted firms. In fact, the SEC noted that in many instances, nearly all personnel whose communications were sampled had engaged in at least some level of unauthorized off-channel communications. The SEC found that the firms' employees, including a significant number of directors, officers, managing directors and other supervisors, used personal devices to engage in off-channel business-related communications through text messaging and other unauthorized platforms, and that the firms failed to maintain or preserve the majority of such communications, in violation of Rule 17a-4(b)(4) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 204-2(a)(7) of the Investment Advisers Act of 1940 ("Advisers Act").

The SEC also found that the firms failed to adequately enforce policies and procedures that purportedly prohibit their personnel from engaging in such communications and failed to reasonably supervise employees within the meaning of Section 15(b)(4)(E) of the Exchange Act and Section 203(e)(6) of the Advisers Act. Relatedly, the SEC noted that the firms' recordkeeping failures likely impacted its ability to carry out regulatory functions and investigate violations of the federal securities laws.

Notably, the SEC credited certain firms for proactively identifying their employees' use of off-channel business-related communications, for conducting an internal investigation, and self-reporting their findings to the SEC. The SEC's Director of Enforcement, Gurbir S. Grewal, pointed out that "[t]here are real benefits to self-reporting, remediating and cooperating". Consistent with that comment, the $2.5 million fine imposed on those self-reporting firms was the smallest penalty imposed on any firm included in the SEC's announcement.

Director Grewal previously stated, in September of 2022, that "broker-dealers and asset managers who are subject to similar requirements under the federal securities laws would be well-served to self-report and self-remediate any deficiencies." Accordingly, broker-dealers and investment advisers would be wise to review their policies, procedures, and controls in place to retain and supervise their employees' electronic communications, and to ensure compliance with their recordkeeping obligations under the federal securities laws.