SEC accuses broker-dealers and affiliated investment advisers of widespread record-keeping failures – Securities

To print this article, all you need to do is be registered or log in to Mondaq.com.

On September 27, 2022, the Securities and Exchange Commission (SEC) announced combined settlements and penalties of more than $1.1 billion related to charges against 15 broker-dealers and one affiliated investment adviser (firms) for misconduct. widespread use of companies and their employees to maintain and preserve written electronic communications in the context of widespread use of personal text messages and other text messaging platforms such as WhatsApp on personal devices (out-of-channel communications). The SEC charged that the Firms’ employees’ use of off-channel communications in the course of their respective brokerage and investment advisory businesses, and the Firms’ failure to monitor and record such off-channel communications, constituted violations of (i) with respect to brokerage business, Rule 17a-4 promulgated under the Securities Exchange Act of 1934 (Exchange Act), and (ii) with respect to investment advisory business, the rule 204-2 enacted under the Investment Advisers Act of 1940.

In their relevant part, Rule 17a-4 and Rule 204-2, applicable to broker-dealers and investment advisers respectively, require broker-dealers and investment advisers to keep in a readily accessible place the originals of all communications received and copies of all written communications sent. relating to their business activities. In implementing these record keeping requirements, dealers and investment advisers are also required to “reasonably supervise” their employees’ compliance with these requirements under Section 15(b)( 4)(E) of the Exchange Act and Section 203(e)(6) of the Advisors Act. As such, brokers and investment advisers will need to take significant proactive steps to ensure compliance and cannot simply rely on the existence of record keeping policies.

The SEC’s corporate investigation found widespread and pervasive use of unmonitored and unrecorded off-channel communications in violation of the Exchanges Act and the Advisors Act. Out-of-channel communications have been used at all seniority levels in companies, both for internal purposes and for external communications with customers, and have been used to discuss critical business issues such as investment, investment banking, market analysis and business results. Each company had certain policies and procedures designed to ensure the retention of company-related records, including regarding prohibitions and limited permitted use of out-of-channel communications, but in each case the companies did not sufficiently implemented training, monitoring and reviewing systems to ensure that their respective policies regarding record keeping and communication are followed by employees. As a result, the SEC uncovered numerous instances of employees ignoring company policies and engaging in non-compliant off-channel communications that were generally not monitored, subject to company review, archived, or otherwise retained.

Given the ubiquity of text messaging and other chat applications in the modern workplace, we anticipate that the SEC will likely emphasize strong record-keeping compliance programs in the future. , and the SEC has repeatedly emphasized that compliance with record-keeping requirements is critical to protecting investors. and the functioning of fair and efficient capital markets. Further, the SEC did not indicate in the relevant settlement orders that it perceived a functional distinction between the record-keeping requirements imposed on dealers and those imposed on investment advisers, and as such, investment advisers should expect that record keeping will be a point of importance in periodic SEC reviews.

In order to ensure compliance with record keeping obligations and to avoid significant financial penalties, dealers and investment advisers will need to ensure that (i) their compliance department has in place detailed policies and procedures regarding use of off-channel communications, and (ii) their compliance departments are authorized and empowered to take proactive steps to monitor employee compliance with record-keeping policies, including through the use of (A) training, (B) enhanced monitoring protocols to investigate incidents of out-of-channel communications, (C) prompt employment action, including impact on compensation and promotion, and termination, following of a breach and (D) investments in technology to facilitate compliant communications.

It is important to note that there is nothing inherently wrong with the use of text messaging and other text messaging or chat applications, as long as they are subject to proper monitoring and retention of records generally applicable to workplace communications in accordance with policies and applicable law. The problem arises when these communications occur outside the scope of a company’s monitoring and retention capabilities, which typically stems from the use of personal devices not provided by the company. Recently, companies have started using apps such as ‘Movius’ and ‘Global Relay’, which secure and record WhatsApp and other text-based communications, while providing employees with communication flexibility. However, these apps only work as long as employees use them appropriately in accordance with company policies, and ultimately it is up to compliance departments to effectively train and monitor employee usage as described above to ensure that use of these applications complies with the record keeping requirements of the Exchange Act, the Advisers Act and other applicable laws.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: US Corporate/Commercial Law

ESG ratings: a call for more transparency and precision

Cadwalader, Wickersham & Taft LLP

In early 2022, the ESG ratings industry caught the eye when electric vehicle maker Tesla Inc. was removed from the S&P 500 ESG Index. Explaining its decision, S&P cited perceived shortcomings…

50 State Nexus Online Experience

Amini & Conant

As businesses increasingly sell goods, hire employees, and operate within multiple state boundaries, they often find themselves wondering, “I operate in the following states…do I need to register in as a foreign entity in each state? »

Final climate rules are months away, reports Bloomberg

Cooley LLP

Here’s a big scoop from Bloomberg: The “SEC is months away from finalizing new climate disclosure requirements as the agency juggles investor demands for more transparency, technology issues and a difficult Republican legal threat. “

About the author