Enforcement News: SEC Underscores Importance of Compliance With Recordkeeping Rules

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Posted on: Apr 10 2024

The federal securities laws impose recordkeeping requirements on registered investment advisers to ensure that they responsibly discharge their roles in the nation’s markets. The Securities and Exchange Commission (“SEC” or “Commission”) has long said that compliance with these requirements is essential to investor protection and to the Commission’s efforts to further its mandate of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

Section 204 of the Advisers Act of 1940 (the “Advisers Act”) authorizes the Commission to issue rules requiring investment advisers to make and keep for prescribed periods, and furnish copies of, certain records. The Commission adopted Advisers Act Rule 204-2 pursuant to this authority. Rule 204-2 specifies the manner and length of time that the records created in accordance with Commission rules, and certain other records produced by investment advisers, must be maintained and produced promptly to Commission representatives.

The rules adopted under Advisers Act Section 204, including Advisers Act Rule 204-2(a)(7), require that investment advisers preserve in an easily accessible place originals of all communications received and copies of all written communications sent relating to, among other things, recommendations made or proposed to be made and any advice given or proposed to be given; any receipt, disbursement, or delivery of funds or securities; or the placing or execution of any order to purchase or sell any security.

In recent years, the SEC has brought charges against numerous firms for violating the foregoing rules.

In September 2022, the SEC fined 15 broker-dealers and one affiliated investment advisor a total of $1.1 billion to settle charges of “widespread and long-standing” regulatory failures (here). The SEC maintained that the firms violated record-keeping requirements, with employees (including those at senior levels) communicating via text messaging and platforms like WhatsApp.

On August 8, 2023, the SEC announced charges against 10 firms in their capacity as broker-dealers and one dually registered broker-dealer and investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications (here). The firms admitted the facts set forth in their respective SEC orders and agreed to pay combined penalties of $289 million to settle charges against them.

In September 2023, 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 (here). To settle the matter, the firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, and agreed to pay combined civil penalties of $79 million.

In February 2024, the SEC charged 16 broker-dealers, dual registrants and affiliated investment advisors for sending and receiving off-channel communications that related to the broker-dealer business, and for sending and receiving off-channel communications that related to recommendations made or proposed to be made and advice given or proposed to be given. To settle the matter, the firms agreed to pay combined civil penalties of $81 million.

Senvest Management LLC, a registered investment adviser, is the latest registered investment adviser to be charged with violating the SEC’s recordkeeping rules.

On April 3, 2024, the SEC announced (here) that it charged Senvest for widespread and longstanding failures to maintain and preserve certain electronic communications. The SEC also charged Senvest with failing to enforce its code of ethics. To settle the matter, Senvest admitted the facts set forth in the Commission’s order (here), acknowledged that its conduct violated the federal securities laws, and agreed to pay a $6.5 million penalty and to implement improvements to its compliance policies and procedures.

According to the Commission’s order, from at least January 2019 through December 2021, Senvest employees at various levels of authority communicated about company business internally and externally using personal texting platforms and other non-Senvest messaging applications in violation of the firm’s policies and procedures. Senvest also failed to maintain or preserve the off-channel communications as required under the federal securities laws and the firm’s policies and procedures. In one instance, said the SEC, three senior employees engaged in off-channel communications on personal devices that were set to automatically delete messages after 30 days. Additionally, the SEC found that certain Senvest employees failed to adhere to provisions of the firm’s code of ethics requiring them to obtain pre-clearance for all securities transactions in their personal accounts.

The SEC found that Senvest violated certain recordkeeping and ethics provisions of the Investment Advisers Act of 1940 and failed to reasonably supervise with a view to preventing and detecting violations. In addition to the $6.5 million penalty, Senvest was censured and ordered to cease and desist from future violations of the relevant provisions of the federal securities laws. The firm also agreed to retain a compliance consultant to, among other things, conduct comprehensive reviews of its policies and procedures relating to the retention of electronic communications found on personal devices and the framework for addressing non-compliance by its employees with those policies and procedures.

Commenting on the order, Eric Werner, Director of the Fort Worth Regional Office, stated: “The Commission continues to focus on regulated entities’ compliance with the recordkeeping requirements. Adherence to these requirements is essential for the Commission to effectively exercise its regulatory oversight and enforce the federal securities laws.”

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.