Recordkeeping failure enforcements: does self-reporting make a difference?

The SEC has announced that they would be charging 16 firms with widespread and longstanding failures to maintain and preserve electronic communications. These situations highlight the importance of maintaining records of off-channel communications, and owning up to mistakes before things take a negative turn.

The organizations charged by the SEC agreed to pay more than $81 million in combined civil penalties, and ultimately all 16 firms named in the release were found to have been engaging in off-channel communications. The broker-dealers admitted that, from at least 2019 or 2020, their employees communicated through personal text messages about the business of their employers. The investment advisers admitted that their employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given.

In all cases, the firms failed to maintain or preserve the substantial majority of these off-channel communications, which is a violation of federal securities law.

For those of you paying attention, this has been a recurring theme from the SEC in recent years:

What’s worth noting from this wave of enforcements is that there was one firm (3 entities collectively known as Huntington) that self-reported its record keeping failures. All other firms in the sweep had to pay anywhere from $8 – $16.5 million in penalties, whereas Huntington only had to pay $1.25 million.

While this is obviously a meaningful decrease relative to the other firms, $1.25 million in penalties is still a material amount of money. While we don’t know how extreme their violation was, it does shed some light on what to expect from the SEC if you do elect to self-report. We would hope the SEC would be more lenient on entities that self-report, particularly in a situation where there is no mention of actual harm that was done to clients. In reading the release from the SEC, this sounds like another case of simply poor record keeping.

How we can help

Our team of international regulatory experts can help you understand the different rules and requirements of the SEC and adapt your compliance systems accordingly.

If this is an area of concern for your business, please don’t hesitate to reach out and we can help provide guidance on how to make sure your business is not the next one to get swept up in one of these headlines.