Registered investment advisor Atom Investors LP based in Texas has avoided a penalty by the SEC despite violating recordkeeping rules with its electronic communication practices.

The SEC alleges that Atom failed to maintain and preserve records of communications on off-channel platforms for more than three years, but only discovered its error when it was served with a subpoena by the SEC relating to an investigation into a third party.

The firm realized there were gaps in its recordkeeping while preparing its response to the subpoena sent by the SEC in connection with the third party, as some of the information requested was not available. The missing records included communications relating to the buying and selling of securities and were not preserved over more than a three-year period required in line with the recordkeeping requirements of the federal securities laws.

The e-comms at the heart of this case included communications by personnel at senior levels of the firm, the SEC said in its order.

The SEC charged the firm with violations of the investment adviser recordkeeping rule, Rule 204-2(a)(7).

The recordkeeping rules are sacrosanct

Addressing why the securities regulator brings these actions in the first place – a long list of them over the last almost-four years, with fines reaching over $3.2 billion combined – SEC Director of Enforcement, Gurbir Grewal, pointed out the problems posed by a lack of readily accessible records needed in an investigation.

“This enforcement matter highlights the risk to investors when firms don’t comply with their recordkeeping obligations: because of Atom Investors’ longstanding failures to preserve required communications, including communications by Atom Investors’ senior personnel, we were hampered in our investigation into a third party.”

Grewal and other US regulators have pointed out that proper recordkeeping is required in order to enable them to determine what happened in cases of allegations of wrongdoing and misconduct and also to ensure transparency and honest dealing in the securities marketplace.

The lack of a monetary penalty

It is interesting that Atom emerged from this investigation by the SEC that resulted in charges without any financial penalty. Other firms have self-reported, cooperated and remediated their compliance programs and received reduced fines – so what was different here?

The SEC said Atom self-reported its recordkeeping violations during the staff’s investigation of that third party firm (so, prompt reporting). And it voluntarily conducted an internal review to identify the scope of the use of these communications and the processes and systems utilized to collect and retain communications. It made changes to its compliance program to prevent future non-compliance with its recordkeeping obligations, that included providing firm-wide, in-person training by outside counsel (so, prompt and hefty remediation).

Atom cooperated in the SEC staff’s investigation of the third party, helping to retrieve, analyze, and organize trading data to match orders directed by the other entity to execution data it held. The SEC indicated that this helped conserve its resources, enabling SEC staff to focus on other areas of the investigation (so, substantive cooperation).

Apparently, the level and immediacy of its efforts went a long way in this case. But, given that another sweep of recordkeeping fines just arrived as I write this, with one firm receiving no fine for its self-reporting efforts here as well, it also seems something else might be happening.

There appears to be a shift in showcasing the carrots rather than the sticks – the incentives instead of just the discipline – and in making the rewards sweeter than they have previously been.

And that SEC effort aligns with the Department of Justice continuing to tout and update its Evaluation of Corporate Compliance Programs and the cooperation regime there, as well as its whistleblower pilot program that is designed to foster not only more reporting of misconduct by individuals, but by businesses as well.

The federal enforcement bodies are aligning their efforts around organizations being able and willing to report their infractions in a timely way in order to save everyone involved money and time — especially when it comes to a seemingly endless litany of the same types of cases (ecomms recordkeeping violations) that the agency seems weary of at this point. Perhaps it’s a case of: “Since most of you have some issues here, can you just tell us about them, please?”

It’s possible the differences in fines and shift to no-penalty orders might have more to do with what the firm did upon discovering the infractions (being prompt, going the distance with cooperation and remediation) than with the specifics of the recordkeeping lapses themselves – the senior managers’ involvement normally considered an aggravating factor and present in the Atom case being one piece of evidence in support of this theory.