The U.S. Securities and Exchange Commission recently announced charges against 11 Wall Street firms for reported extensive recordkeeping shortcomings. These firms reportedly acknowledge their misconduct and have reached an agreement to pay a combined sum of $289 million in penalties, according to an Aug. 8 news release.
“Compliance with the books and records requirements of the federal securities laws is essential to investor protection and well-functioning markets," Gurbir S. Grewal, SEC Division of Enforcement director, said in the release. "To date, the Commission has brought 30 enforcement actions and ordered over $1.5 billion in penalties to drive this foundational message home. And while some broker-dealers and investment advisers have heeded this message, self-reported violations or improved internal policies and procedures, today’s actions remind us that many still have not.”
The SEC has taken action against 10 broker-dealer firms and one dually registered broker-dealer and investment adviser due to extensive and longstanding failures in preserving electronic communications, the release reported. The firms acknowledged their violations of recordkeeping provisions in federal securities laws.
This acknowledgment led them to agree to a combined penalty payment of $289 million. Additionally, the firms have initiated the implementation of enhanced compliance protocols to address the identified violations, according to the release.
The SEC's investigation revealed all 11 firms engaged in pervasive and long-standing "off-channel" communications. These communications occurred via various messaging platforms on employees' personal devices, discussing their employers' business matters, the release said.
The firms reportedly did not adequately preserve or maintain the majority of these off-channel communications, which violated federal securities laws. This failure to maintain the necessary records hindered the Commission's ability to effectively oversee and enforce compliance, the release reported. The violations extended across different levels of authority within the firms. These findings stemmed from actions as early as 2019.
Charges were filed against each broker-dealer for violating recordkeeping provisions of the Securities Exchange Act of 1934 and for failing to properly supervise to prevent such violations. Wedbush Securities Inc., the dually registered entity, faced additional charges under the Investment Advisers Act of 1940 for similar violations, according to the release.
In addition to the substantial financial penalties, the firms were ordered to cease and desist from further violations and were censured. They also agreed to engage independent compliance consultants to conduct thorough evaluations of their policies and procedures pertaining to the retention of electronic communications on personal devices, the release said. The consultants will also assess their frameworks for addressing employee non-compliance.
"So here are three takeaways for those firms who haven’t yet done so: self-report, cooperate and remediate," Grewal said in the release. "If you adopt that playbook, you’ll have a better outcome than if you wait for us to come calling."
