Recordkeeping And What You Need To Know To Keep Your Firm Safe

The Securities and Exchange Commission (SEC) recently announced charges against several broker-dealers and investment advisers for failing to maintain and preserve electronic communications, violating recordkeeping provisions of federal securities laws. These violations resulted in combined civil penalties exceeding $81 million. The firms involved admitted to the violations and agreed to pay penalties, implement compliance improvements, and cease future violations.

The investigations revealed widespread and longstanding use of unapproved communication methods, known as off-channel communications, by employees of the firms. These communications, conducted via personal text messages and other means, were related to business activities but were not properly maintained or preserved as required by law.

The SEC charged the firms with violating recordkeeping provisions and failing to supervise employees to prevent and detect these violations. Each firm was ordered to pay penalties, cease future violations, and retain independent compliance consultants to review and enhance their policies and procedures.

Investment advisors and broker-dealers must ensure compliance with recordkeeping regulations to avoid similar enforcement actions. This case underscores the importance of proper recordkeeping and supervision to maintain regulatory compliance and avoid significant penalties.

One of the key aspects of regulatory compliance for investment advisors and broker-dealers is the preservation and maintenance of electronic communications. These communications, including emails, instant messages, and text messages, provide crucial evidence of business activities, client interactions, and compliance with regulatory requirements.

However, the recent enforcement actions by the SEC highlight the challenges faced by firms in maintaining adequate records of electronic communications. Despite advances in technology and communication tools, many firms continue to struggle with the proper retention and preservation of electronic communications.

One of the main reasons for this challenge is the use of personal devices and communication channels for business-related purposes. Employees may use personal smartphones, tablets, or email accounts to conduct business, making it difficult for firms to track and archive these communications.

Additionally, the fast-paced nature of the financial industry often leads to rapid and frequent communication between employees and clients. As a result, firms may struggle to keep up with the volume of electronic communications and ensure that all relevant messages are properly preserved.

To address these challenges, investment advisors and broker-dealers must implement robust recordkeeping policies and procedures. This includes providing employees with clear guidance on the use of personal devices and communication channels for business purposes, as well as implementing technology solutions to capture and archive electronic communications in real-time.

Furthermore, firms must regularly review and update their recordkeeping policies to ensure compliance with evolving regulatory requirements. This includes staying abreast of new guidance and best practices issued by regulatory authorities, as well as conducting regular audits and assessments of recordkeeping practices.

By prioritizing recordkeeping compliance and investing in the necessary resources and technology, investment advisors and broker-dealers can mitigate the risk of enforcement actions and protect their firms from regulatory scrutiny.

The recent enforcement actions by the SEC serve as a stark reminder of the importance of recordkeeping compliance for investment advisors and broker-dealers. Firms must take proactive steps to ensure that their electronic communications are properly preserved and maintained, and that employees are adequately trained and supervised in recordkeeping practices. Failure to do so can result in significant penalties and reputational damage for firms, highlighting the critical importance of this aspect of regulatory compliance.