On September 27, 2022, the Securities and Exchange Commission (“Commission”) entered into a series of settled orders (“Orders”) against 15 broker-dealers and one affiliated investment adviser for widespread failures by the firms to preserve electronic communications. The firms were required to admit the facts set forth in their respective orders, acknowledge that their conduct violated the recordkeeping provisions of the federal securities laws, retain compliance consultants to conduct comprehensive reviews of their related policies and procedures, and pay combined penalties exceeding $1.1 billion.
The Commission’s Orders found that employees of the firms, including those with high levels of authority, routinely used text messaging applications on their personal devices to discuss business matters. On the whole, the firms failed to preserve such off-channel communications.
These actions were in violation of the recordkeeping rules under the Securities Exchange Act of 1934, which requires, among other things, that broker-dealers preserve communications relating to business matters, and, in the case of the affiliated investment adviser, the recordkeeping rules under the Investment Advisers Act of 1940, which imposes similar requirements on investment advisers. The firms were also charged with failing to supervise their employees.
These matters follow a similar recordkeeping case, brought in December, against the broker-dealer subsidiary of a global financial services company. They also follow a December 14, 2008 Risk Alert issued by the Commission’s Office of Compliance Inspections and Examinations (now called the Division of Examinations) noting “pervasive use” by employees of investment advisers of texting and other electronic messaging apps on their personal devices for business purposes.
The Commission expects to see formal policies and procedures concerning the use of approved communications channels, employee training and attestations, and appropriate supervisory review. Additionally, the Commission’s emphasis on senior executives as well as more junior employees indicates that it is concerned with tone at the top culture issues regarding use of personal devices.
If you have any questions concerning the matters covered in this alert, please contact your primary attorney at Seward & Kissel, or any of the partners or counsel listed below.