On August 14, 2024 the SEC announced settlements with 26 broker-dealers, investment advisers, and dual registrants for failures in maintaining and preserving electronic communications.
Mark Astarita, a securities defense attorney with Sallah Astarita & Cox, LLC, commented, “We have been telling firms for over a year to review their policies and procedures regarding customer communications. Recordkeeping has become cumbersome and costly due to the widespread use of social media and text messages. However, that cost does not approach the millions of dollars each of these firms paid in fines. At the same time, the penalties do not relate to the actual harm caused by the recordkeeping failures; rather, they are apparently based on the size of the firm.”
Widespread Recordkeeping Failures Identified
The SEC’s investigation uncovered extensive and longstanding failures among these firms to adhere to the recordkeeping provisions mandated by federal securities laws. Personnel at various levels, including supervisors and senior managers, were found to have used unapproved communication methods, often referred to as off-channel communications. These methods bypassed the required channels, resulting in records that were not maintained as legally required.
Firms Admitting to Violations
Each of the 26 firms admitted to the facts laid out in the SEC’s orders, acknowledging that their actions violated the recordkeeping provisions of the Securities Exchange Act and the Investment Advisers Act. The firms agreed to pay a total of $392.75 million in civil penalties.
Penalties Imposed and Self-Reporting Incentives
While all firms involved have faced substantial penalties, three firms received reduced penalties for self-reporting their violations before the SEC’s investigation. This proactive cooperation highlights the benefits of self-reporting in regulatory compliance matters.
Notable Penalties Include:
- – Ameriprise Financial Services, LLC – $50 million
- – Edward D. Jones & Co., L.P. – $50 million
- – LPL Financial LLC – $50 million
- – Raymond James & Associates, Inc. – $50 million
- – RBC Capital Markets, LLC – $45 million
- – BNY Mellon Securities Corporation and Pershing LLC – $40 million
- – TD Securities (USA) LLC and related entities – $30 million
SEC’s Emphasis on Compliance
The SEC’s Division of Enforcement, led by Director Gurbir S. Grewal, emphasized the importance of compliance with the books and records requirements under federal securities laws. Grewal highlighted the essential role these records play in protecting investors and ensuring well-functioning markets.
Off-Channel Communications: A Pervasive Issue
The SEC’s investigation revealed that the use of off-channel communications was widespread across the firms, creating significant challenges in maintaining the required records. The failure to preserve these records not only violates federal securities laws but also hampers the SEC’s ability to conduct thorough investigations.
Consequences Beyond Financial Penalties
In addition to the financial penalties, the firms involved have been ordered to cease and desist from future violations of the relevant recordkeeping provisions. They have also been censured, reinforcing the SEC’s commitment to ensuring compliance and protecting investors.
