United States: SEC Charges 11 Firms with Record Retention Violations

By: Neil Smith , Hayley Trahan Liptak and Peter Shanley

For over twenty months, the U.S. Securities and Exchange Commission (SEC) has steadily announced settled orders against broker-dealers and investment advisers for failure to retain business-related communication.  On 8 August 2023, the SEC released another round of settled orders with 11 firms for violation of Exchange Act Rule 17a-4 for failing to retain off-channel business-related communication.  One dually registered broker-dealer and investment adviser was also charged with violating recordkeeping provisions of the Investment Advisers Act of 1940.  The content of the orders, and the firms involved, show the SEC’s attention may be shifting from wide-spread violations at large institutions to more limited compliance failures at firms of differing sizes. The assessed penalties, although still considerable, are consistent with this shift.

While the August orders continue to cite to “pervasive” off-channel communication, the SEC appears focused on more than widespread systematic violations.  While the September 2022 orders note that firm personnel “sent and received tens of thousands of off-channel communication,” with most penalties ranging from $50-$125 million, in eight of the August orders, the SEC instead pointed to “numerous off-channel communications.” Penalties for these firms ranged from $9 million to $35 million. A review of the over 30 different record-keeping related orders since December 2021 shows the SEC may be considering three levels of violations with corresponding penalties: “numerous off-channel communications,” “thousands of messages,” and “tens of thousands” of messages.  Any communication that is not captured by the firm’s record retention protocols may be at issue, including LinkedIn, WhatsApp, and text messages.

In total, the SEC has now ordered over $1.5 billion in fines and targeted over 30 institutions. For the foreseeable future, the SEC is expected to continue its sweep and all market participants, regardless of size, should prepare for their turn under the microscope.