More SEC charges over ‘widespread’ recordkeeping failures

US regulators fined eight companies a combined $111m in the latest actions.

On Friday, the SEC announced charges against five broker-dealers, three dually registered broker-dealers and investment advisers, and two affiliated investment advisers for widespread and longstanding failures to maintain and preserve electronic communications.

The firms admitted the facts set outh in their respective SEC orders and acknowledged that their conduct violated recordkeeping provisions of the federal securities laws. The firms agreed to pay combined penalties of $79m as outlined below and have begun implementing improvements to their compliance policies and procedures to address these violations.

The firms settling with the securities regulator were:

  • Interactive Brokers Corp and affiliate Interactive Brokers LLC – $35m penalty;
  • Robert W. Baird & Co. Inc – $15m penalty;
  • William Blair & Company LLC and affiliate William Blair Investment Management LLC – $10m penalty;
  • Nuveen Securities LLC – $8.5m penalty;
  • Fifth Third Securities Inc – $8m penalty; and
  • Perella Weinberg Partners LP, together with Tudor, Pickering, Holt & Co Securities LLC and Perella Weinberg Partners Capital Management LP, which self-reported, agreed to pay a $2.5m penalty (“Perella Weinberg,” collectively).

The SEC said its investigations uncovered pervasive and longstanding off-channel communications at all 10 firms and that the broker-dealer firms admitted that, from at least 2019, their employees communicated through personal text messages about the business of their employers.

And the investment adviser firms 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. The failures involved employees at multiple levels of authority, including supervisors and senior managers, the SEC said.

“One of the orders included in today’s announced actions is not like the others. There are real benefits to self-reporting, remediating and cooperating.”

Gurbir Grewal, Director, SEC Division of Enforcement

The firms also did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws, the securities watchdog said.

All of the firms agreed to retain independent compliance consultants to conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures. The Commodity Futures Trading Commission announced settlements with Interactive Brokers for related conduct in a separate action.

Focus on cooperation credit

“One of the orders included in today’s announced actions is not like the others,” said Gurbir S Grewal, Director of the SEC’s Division of Enforcement. “There are real benefits to self-reporting, remediating and cooperating.”

Grewal was referring to Perella Weinberg’s prompt and thorough remedial efforts, which led to its much smaller fine and significant attention in its cease and desist order.

After identifying the off-channel communications, the firm conducted an internal investigation and self-reported the facts to SEC staff. Before approaching the agency’s staff, in August 2019, Perella had begun a program of remediation, which included issuing firm-issued devices to all employees; strengthening its self-policing procedures by making investments in new technologies to improve surveillance efforts; and conducting trainings and sending firm-wide reminders that emphasized the importance of complying with recordkeeping obligations.

The company also enhanced its policies and procedures and increased training concerning the use of approved communications methods.

As part of its agreement with the SEC, Perella agreed to employ an independent compliance consultant to review supervisory, compliance, and other policies and procedures; its training; the surveillance program measures implemented to ensure compliance, on an ongoing basis, with legal requirements to preserve electronic communications; the technological solutions it has begun implementing to meet the record retention requirements, including an assessment of the likelihood personnel will use the technological solutions going forward; and the measures Perella will use to track usage of the new solutions.

The issue of preserving these off-channel communications goes to the heart of the regulators’ ability to monitor the firms it is charged with overseeing.

Enforcement in this arena has resulted in more than $2.5 billion in fines in just the last two years. Given this, businesses need to specifically plan their approach to these communication and recordkeeping mandates and acknowledge the regulators’ evident lack of patience in this arena.

As the SEC and CFTC repeatedly state in their commentary in these resolutions, the issue of preserving these off-channel communications goes to the heart of the regulators’ ability to monitor the firms it is charged with overseeing.

Generally speaking, the businesses receiving this consistent negative press, fines, mandated compliance consultant reviews and remedial undertakings are failing to implement sufficient monitoring to assure that their own recordkeeping and communications policies are being followed.

They have the policies. They just don’t have everything else needed for them to be used, such as the monitoring processes and technology needed to ensure policies are being used effectively, plus incentives and training, so employees will follow them and know how to do so.

Charges against credit-rating agencies

The SEC also announced charges against credit rating agencies DBRS Inc. and Kroll Bond Rating Agency, LLC for longstanding failures to preserve electronic records, including off-channel communications on personal and work-issued devices. To settle the charges, DBRS agreed to pay $8m in civil penalties and KBRA agreed to pay $4m in civil penalties.