The SEC and the CFTC have announced charges against another 26 broker-dealers and investment advisers for significant recordkeeping failures. The combined $477.75 million in fines add to the penalties already levied for widespread and longstanding failures to maintain and preserve electronic communications bringing the total to over $3 billion.
The findings from this latest round of actions mirror those of other recent enforcement cases, and serve as a stark reminder that the obligations and ongoing regulatory scrutiny on recordkeeping and supervision haven’t gone away.
While credit in the form of lower penalties was given to the three firms that proactively co-operated by self-reporting their record-keeping failures, such enforcement action still brings adverse financial, reputational and operational consequences. Keeping employees on monitored channels and tools where records can be retained and communications supervised, instead of going off-channel for communications, is the only way to avoid future sanctions.
“....the CFTC’s message remains clear—recordkeeping and supervision requirements are fundamental, and registrants that fail to comply with these core obligations do so at their own peril.” |
“....we remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets,” |
Below is a summary of key findings, actions and takeaways.
Pervasive record-keeping violations were identified
The SEC’s investigations uncovered pervasive and longstanding use of unapproved or ‘off-channel’ communication at each firm. The failures were widespread, involving employees of all seniority levels including supervisors and senior managers. Employees sent and received off-channel communications internally and externally with colleagues, clients, customers, and other participants in the securities industry, which included investment recommendations, advice or related to placing or executing trades.
Not maintaining or preserving off-channel communications also had a direct impact on the regulator’s ability to carry out its investigations. The SEC has frequently reiterated that preserved records are the primary means by which it monitors compliance with applicable securities laws.
Widespread non-compliance with firms’ own policies
The investigation also found widespread and longstanding failures in firms’ adhering to their own policies and procedures, including those that specifically prohibited unmonitored communications. Employees had been advised that the use of unapproved electronic communications methods was not permitted, and they should not use personal email, chats or text messaging applications for business purposes, or forward work-related communications to unapproved applications on their personal devices.
The steps taken to remedy non-compliance
Each firm has undertaken significant action to improve their compliance policies and procedures, including a review of recordkeeping and a program of remediation. Significant remedial action was also mandated by the regulator, bringing additional financial and operational costs including:
The key takeaways for financial services firms:
As with all enforcement actions there are lessons to be learned and the regulator gives a deliberately clear message to other firms, in-line with previous advice.
In the current regulatory climate, if firms choose to do nothing and unmonitored communications are found by a regulatory body, then significantly larger sanctions are likely including the potential for senior individual liability and accountability. Ensuring employees have access to channels and tools that they and customers want to use, and where records can be retained and communications supervised is the only way to avoid future penalties.