The Securities and Exchange Commission has charged more than 100 firms in recent years over failure to maintain and preserve electronic communications like staff members' business-related texts and WhatsApp messages, a trend some SEC commissioners and industry sources say is problematic.
“The SEC has been on a bit of a crusade for the last 18 months or so,” said Adam Kanter, a partner at Mayer Brown. There seems to be very little that SEC registrants, like broker-dealers, investment advisers and credit rating agencies can do to avoid the SEC’s “crosshairs,” he added.
“The SEC seems to be setting everyone up for an expectation of perfection and that is not the way compliance programs work,” Kanter said, noting such programs are supposed to be “reasonably designed” to prevent violations of federal securities laws.
“But the SEC is taking a very hard line in a lot of these cases and essentially saying even if you have a firm device policy, even if you have training, robust controls, checks and certifications, the implication from a lot of these cases seems to be … if you are not actually preventing all of these off-channel communications, you are potentially ripe for a settlement.”
Since December 2021, the SEC has settled charges with more than 100 firms and resulting in more than $2 billion in penalties for failures to maintain and preserve electronic communications, according to an SEC tally. In each case, the firms admitted that their conduct violated federal securities laws and have begun implementing improvements to their compliance policies and procedures, the SEC noted.
A $125 million settlement with J.P. Morgan Securities over record-keeping failures in December 2021 was the SEC’s first public display of its new enforcement initiative. Since then, dozens of firms, including Goldman Sachs ($125 million); Morgan Stanley ($125 million); Ameriprise Financial Services ($50 million); LPL Financial ($50 million); Raymond James & Associates ($50 million); Invesco Distributors ($35 million); Moody’s Investors Service ($20 million); and S&P Global Ratings ($20 million), have settled similar charges.
The SEC isn’t alleging these firms, nor the dozens of others, are engaging in fraud by not preserving business-related texts, according to Marc E. Elovitz, co-managing partner at Schulte Roth & Zabel. “What they’re saying is there’s these books and records requirement and we’re not going to be able to investigate fraud unless we get access to all this stuff,” Elovitz said.
Often in the announced settlements, the SEC says broker-dealer firms’ employees communicated through personal text messages about their firm’s business, or that investment adviser firms’ employees sent and received off-channel communications related to recommendations or advice made or proposed. The SEC in multiple instances has also said that the firms’ failures involved employees at varying levels of authority, including supervisors and senior managers.