16 “At One Blow” – The SEC Sanctions for Recordkeeping Failures

On September 27, 2022, the SEC announced that it had sanctioned 15 Broker-Dealers and one affiliated RIA for widespread recordkeeping violations of Section 17(a)(1) of the Exchange Act and Rule 17a-4(b)(4) thereunder resulting from the firms’ failure to maintain and preserve electronic communications. The SEC uncovered the misconduct after commencing a September 2021 sweep – a risk-based initiative to investigate the use of off-channel and unpreserved communications at broker-dealers. These firms agreed to the facts set forth in the SEC’s Order Imposing Remedial Sanctions and a Cease-and-Desist and agreed to pay total penalties of $1.1 BILLION and to implement improvements to their compliance policies and procedures.

The SEC Press Release advised that:

“Finance, ultimately, depends on trust. By failing to honor their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust.”… As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.”

The Release disclosed that:

  • “The following eight firms (and five affiliates) have agreed to pay penalties of $125 million each:
    • Barclays Capital Inc.;
    • BofA Securities Inc. together with Merrill Lynch, Pierce, Fenner & Smith Inc.;
    • Citigroup Global Markets Inc.;
    • Credit Suisse Securities (USA) LLC;
    • Deutsche Bank Securities Inc. together with DWS Distributors Inc. and DWS Investment Management Americas, Inc.;
    • Goldman Sachs & Co. LLC;
    • Morgan Stanley & Co. LLC together with Morgan Stanley Smith Barney LLC; and
    • UBS Securities LLC together with UBS Financial Services Inc.
  • The following two firms have agreed to pay penalties of $50 million each:
    • Jefferies LLC; and
    • Nomura Securities International, Inc.
  • Cantor Fitzgerald & Co. has agreed to pay a $10 million penalty.”

Of note, the period at issue is January 2018 through September 2021 (which includes the first year and a half of the pandemic lockdown and remote work for the majority of Americans). The SEC’s investigation concluded that in “using their personal devices, these employees communicated both internally and externally by personal text messages or other text messaging platforms such as WhatsApp” and “supervisors, who were responsible for preventing this misconduct among junior employees, routinely communicated off-channel using their personal devices. In fact, dozens of managing directors across the firms and senior supervisors responsible for implementing policies and procedures and for overseeing employees’ compliance with those policies and procedures themselves failed to comply with the firm policies by communicating using non-firm approved methods on their personal devices about the firm’s broker-dealer business.” During this period, “Respondents failed to maintain and preserve off-channel communications its employees sent and received related to the broker-dealer’s business.”

In October 2019, FINRA published its 2019 Examination Findings Report where it covered “Digital Communications” and noted that:

FINRA Rule Series 4510 (Books and Records Requirements) require a firm to, among other things, create and preserve, in an easily accessible place, originals of all communications received and sent relating to its “business as such.” If a firm permits its associated persons to use a particular application—for example, an app-based messaging service or a collaboration platform—the firm must preserve records of business-related communications and supervise the activities and communications of those persons on the application. Firms remain responsible for conducting due diligence to comply with the securities laws and FINRA rules and follow up on red flags of potentially violative activity and may, in some cases, use services provided by the relevant digital channel or third-party vendors.

The 2019 Examination Findings Report went on the discuss “Noteworthy Examination Findings” and among them was:

  • Use of Prohibited Digital Channels – In some instances, firms prohibited the use of texting, messaging, social media or collaboration applications (e.g., WhatsApp, WeChat, Facebook, Slack or HipChat) for business-related communication with customers, but did not maintain a process to reasonably identify and respond to red flags that registered representatives were using impermissible personal digital channel communications in connection with firm business. Red flags could be detected through, for example, customer complaints, representatives’ email, outside business activity reviews or advertising reviews.

FINRA’s Examination Findings Reports are good sources for forecasting regulatory and disciplinary actions. Clearly, FINRA found the issue of supervision of text messaging to be noteworthy as early as 2019. As it appears no respite will be given for the pandemic period, it is worth broker-dealers’ time and energy to keep track of these FINRA Examination Findings Reports and to review and revise their policies and procedures accordingly.

Please contact us if we can be of assistance to you in this endeavor.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Sandra D. Grannum

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense. She is co-chair of the Commercial Litigation Team.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

About the Author: Jamie L. Helman

Jamie L. Helman concentrates her practice on securities, broker-dealer arbitration, litigation, mediation, employment matters, and regulatory defense. She has experience first-chairing FINRA arbitrations, defended on-the-record testimony of broker-dealer employees before FINRA, and is presently involved in the representation of broker-dealers in several pending FINRA cases as well as regulatory matters.

About the Author: Fred Reish

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

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