- On September 29, 2023, the Securities and Exchange Commission (“SEC”) announced charges against five broker-dealers, three dually registered broker-dealers and investment advisers, and two affiliated investment advisers for their longstanding failures to maintain and preserve electronic communications in violation of federal laws.
- The targeted firms agreed to pay $79 million in combined penalties and retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications.
- The charges come approximately one year after the SEC and Commodity Futures Trading Commission (“CFTC”) charged over a dozen other broker-dealers and investment advisers with similar recordkeeping violations in September 2022, resulting in more than $1.8 billion in penalties. Months prior to those cases, in December of 2021, a broker-dealer subsidiary of a major U.S. financial institution agreed to pay $200 million to the regulators for similar violations.
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”).