Compliance, Enforcement

Sixteen Firms Agree to $81 Million to Settle Charges for Recordkeeping Failures

By Mark J. Astarita

For months we have been advising financial firms to pay attention to the use of messaging services by their employees and to avoid penalties for recordkeeping failures. Firms are required to maintain archival records of all business-related communications. The SEC‘s crackdown started in the middle of last year. The first significant enforcement announcement was in August 2023, which we covered in SEC Charges 11 Firms For Failing Electronic Communications Compliance. This month, the enforcement efforts continue, as the SEC has fined sixteen financial firms for failing to maintain those records. Those firms, a mix of broker-dealers, investment advisers, and their dual registrants, have collectively agreed to a staggering penalty exceeding $81 million in fines and penalties.

The Firms and Penalties

Notably, the penalties imposed reflect the severity and scope of the recordkeeping failures identified by the SEC. Among the firms, Northwestern Mutual entities are set to pay $16.5 million, while Guggenheim Securities and its affiliates will contribute $15 million to the settlement. Other notable penalties include Oppenheimer & Co. Inc. at $12 million, Cambridge Investment Research entities with $10 million, and Key Investment Services alongside its affiliates also agreeing to a $10 million penalty. This tiered penalty structure not only highlights the widespread nature of the infractions. According to the SEC, it also reflects a “tailored approach” to enforcement. In my decades of dealing with the SEC, I am not so sure about a “tailored approach” as they often pummel smaller firms. But that is a discussion for another day.

Recordkeeping Lapses

The SEC’s findings reveal an issue within the industry, with unauthorized communication methods, including personal text messages and emails, being used to conduct official business. This practice, spanning from at least 2019 or 2020, not only contravened recordkeeping rules but also potentially compromised the SEC’s investigative capabilities. Such widespread non-compliance underscores the critical need for firms to revisit and reinforce their internal controls and compliance frameworks to prevent future violations.

Enforcement and Compliance: The Road Ahead

In response to these violations, each implicated firm has been mandated to cease further breaches of recordkeeping provisions and accept censure. Furthermore, the settlement includes the appointment of independent compliance consultants tasked with conducting thorough reviews of each firm’s policies and procedures related to electronic communication retention. This measure aims to ensure a comprehensive overhaul of existing compliance frameworks, addressing the root causes of non-compliance and fortifying the firm’s commitment to upholding the highest standards of regulatory compliance.

Implications for the Financial Sector

The SEC’s decisive action serves as a stark reminder of the critical importance of compliance with federal securities laws, particularly in an era where digital communications are ubiquitous. It signals to all regulated entities the necessity of rigorous internal controls over electronic communications and the potential consequences of failing to meet these standards. As the financial industry continues to evolve, this enforcement action underscores the need for ongoing vigilance and adaptation in compliance practices, ensuring that the integrity of the financial markets is preserved.

Enhancing Compliance Practices

For financial firms, this situation highlights the urgent need to assess and enhance their compliance strategies, particularly concerning electronic recordkeeping. Adopting advanced technologies for monitoring and archiving electronic communications, along with rigorous training for employees on compliance standards, can serve as effective measures to prevent future violations. Additionally, fostering a culture of compliance within organizations is paramount, encouraging employees at all levels to prioritize adherence to regulatory requirements.

A Look Ahead

In conclusion, the SEC’s enforcement action against these sixteen financial firms for recordkeeping failures is a critical development in the regulatory landscape. It not only penalizes past infractions but also sets a precedent for what is expected of financial institutions in terms of compliance. As the industry moves forward, the lessons learned from this episode will undoubtedly shape the future of regulatory adherence, with an increased focus on technological solutions and internal culture shifts to ensure compliance.

SEC Press Release

Sallah Astarita & CoxRepresenting Advisors and Investors, Nationwide.
Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | mja@sallahlaw.com | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.

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