On September 22, 2022, the Securities and Exchange Commission announced charges against 15 wall street broker-dealers and one affiliated investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications during January 2018 through September 2021 review period. You can read the commissions summary and links for all 15 orders here. Below are some of the key finding and takeaways.
Attestations Alone Don’t Protect the Firm
What’s key about these charges is that many of the Firm’s had procedures, training and even attestations in place for all Associated Persons to document and attest to the Firm’s electronic communication policies. Specifically, Firm’s had policies and procedures, and supervisory monitoring controls over approved venues of communication. However, the SEC routinely noted that Firm’s failed to implement a system of follow-up and review to determine that supervisors were reasonably following the firm’s policies. While permitting employees to use approved communications methods, including on personal phones, for business communications and monitoring these items, no controls were put in place to conduct sufficient monitoring to assure that its recordkeeping and communications policies were being followed. This illustrates that Firm’s do not escape liability for setting up the program for approved communications they must also look at controls for unapproved/off channel usage throughout the company.
Supervisors and Senior Managers Aren’t Exempt from Regulatory Rules
The rules adopted under Section 17(a)(1) of the Exchange Act, including Rule 17a-4(b)(4), require that broker-dealers preserve in an easily accessible place, originals of all communications received, and copies of all communications sent relating to the firm’s business as such. These rules impose minimum recordkeeping requirements that are based on standards a prudent broker-dealer should follow in the normal course of business. Violations occurred throughout the company from traders to supervisors and senior executives and even those who were in charge of implementing and overseeing employee’s compliance with the Firm’s communication guidelines. Supervisors using their unapproved/off channel personal devices for Firm business (I.e., slack, what’s app), even without communicating with clients, is still in violation of books and records rules.
Remediation Efforts Can Be Accomplished Before Sanctions
The SEC’s order required the fined Firm’s to engage with an outside compliance consultant approved by the commission to support the Firm’s in reviewing the following items below with requirements to fully cooperate with the consultants and certifications submitted on a specific timeline imposed by the commission.
- Policies and Procedures
- Training
- Framework for those identified as non-compliant
- Technology Systems
- Supervisory Controls
Firms don’t have to wait until fines or censures are at play before looking at their program and controls. Building a proactive compliance program that includes controls for monitoring non-approved usage are key to staying in regulatory compliance. As Deputy Director of Enforcement Sanjay Wadhwa, warned, “These actions deliver a straightforward message to registrants: You are expected to abide by the Commission’s recordkeeping rules. The time is now to bolster your record retention processes and to fix issues that could result in similar future misconduct by firm personnel.”
With decades of experience building solid compliance programs, our team can provide specialized support to help your Firm with proactive compliance solutions. If you would like to learn more, Contact us today.