What: The SEC announced charges against 12 firms (comprising broker-dealers, investment advisers, and a dual-registered BD/IA) for failures by the firms and their personnel to maintain and preserve certain electronic communications in violation of recordkeeping requirements.
Who: The firms admitted the facts in their respective orders and, with the exception of one firm, agreed to pay combined civil penalties of more than $88 million to settle the SEC charges.
When: The SEC announced the charges on September 24, 2024.
Why: Much of the enforcement activity appears to have resulted from the SEC’s risk-based initiatives to investigate the use of off-channel communications at broker-dealers and registered investment advisers, but in one case it began with an unrelated investigation by the SEC that ultimately led to discovery of the off-channel matter. Additionally, three of the firms self-reported to the SEC.
How: The SEC charged each firm with violating certain recordkeeping provisions of the Securities Exchange Act or the Investment Advisers Act or both. In addition, the SEC found that all but one of the firms failed to reasonably supervise their personnel with a view to preventing and detecting those violations, and in one instance, the SEC also found that the particular firm failed to adopt and implement policies and procedures reasonably designed to prevent the firm and its supervised persons from violating recordkeeping requirements.
Why it matters: The SEC’s press release emphasized the different outcomes between those firms that self-reported and those that did not. The announcement specifically linked the action of self-reporting by two of the firms to the payment of “significantly lower civil penalties than they would have otherwise.” However, what is possibly more interesting is that Qatalyst Partners LP (Qatalyst) was not required to pay any civil penalty despite an internal investigation that uncovered that its personnel at various levels of authority had sent and received off-channel communications related to its broker-dealer business. In support of this result, the SEC noted in the Qatalyst order that the Commission did not impose a civil penalty“[b]ecause of Qatalyst’s self-policing, self-report, prompt remediation, and cooperation. . . .” Therefore, while acknowledging the potential variability of results when applying another set of facts, the Qatalyst order does suggest a better-defined framework that firms can consider leveraging when approaching both their own ongoing communications compliance program (self-policing) and if they find themselves in non-compliance with recordkeeping requirements (self-report, prompt remediation, and cooperation).
CRC is a business-focused team of senior compliance consultants and executives who bring a unique tailored approach to help our clients succeed in today’s challenging regulatory and economic environment, enabling and empowering our clients to manage the “cost of compliance” without sacrificing the necessary infrastructure and control environment. Please contact Mitch Avnet to setup an introductory discussion: (646)346-2468 | mavnet@compliance-risk.com
