The SEC just announced charges against 12 firms for failure to keep and maintain electronic communications, in violation of the recordkeeping provisions of the Securities Exchange Act and the Investment Advisers Act.

An additional company, the Canadian Imperial Bank of Commerce (CIBC), was fined in a parallel action by the Commodities Futures Trading Commission (CFTC).

CIBC is accused of violating the analogous recordkeeping provisions of the Commodities Exchange Act (CEA).

Qatalyst gets a reprieve

All of the charged firms have agreed to pay fines as part of their settlements, with the exclusion of one – the broker-dealer Qatalyst Partners LP, which was exempted from paying a money penalty.

Unlike the other firms, Qatalyst conducted an internal investigation and discovered that many employees, including senior staff, had conducted off-channel business-relevant communications that went unpreserved.

Qatalyst’s internal investigation was prompted by previous enforcement actions and penalties, the SEC stated.

Qatalyst then disclosed this information to the SEC. As a result, the SEC granted Qatalyst a “no-penalty” resolution, saying it had “demonstrated substantial efforts at compliance with the recordkeeping requirements, and self-reported its noncompliance.”

Two of the charged broker-dealer firms, Canaccord and Regions, self-reported their violations and received reduced penalties.

“Widespread and longstanding failures, including where those failures potentially hinder the Commission’s investor protection function by compromising a firm’s response to SEC subpoenas, may result in robust civil penalties,” said the SEC’s Enforcement Director Gurbir Grewal.

SEC fines

The following firms were fined:

Dually-registered entity

• Stifel, Nicolaus & Company, Inc. agreed to pay a $35m penalty;

Investment adviser

• CIBC World Markets Corp., together with CIBC Private Wealth Advisors, Inc., agreed to pay a $12m penalty;
• Invesco Distributors, Inc., together with Invesco Advisers, Inc., agreed to pay a $35m penalty;

Broker-dealer

• Glazer Capital, LLC agreed to pay a $2m penalty;
• Intesa Sanpaolo IMI Securities Corp., agreed to pay a $1.5m penalty;
• Canaccord Genuity LLC agreed to pay a $1.25m penalty*;
• Regions Securities LLC agreed to pay a $750,000 penalty*;
• Alpaca Securities LLC agreed to pay a $400,000 penalty;
• Focused Wealth Management, Inc. agreed to pay a $325,000 penalty; and
• Qatalyst Partners LP will not pay a penalty.

All firms were censured and ordered to cease and desist from future recordkeeping violations.

All except Qatalyst and Focused Wealth Management (FWM) had to retain third-party compliance consultants as part of their settlement agreements. FWM had already already retained a compliance consultant prior to the SEC’s order.

Notably, the SEC stated that FWM failed to adopt adequate policies or procedures to prevent recordkeeping violations. This included generally permitting employees to use text messaging for internal business communications.

CFTC fine

The CFTC issued an order simultaneously filing and settling charges with the swap dealer, CIBC, for failing to maintain and preserve records that were required to be kept under CFTC recordkeeping requirements and for also failing to diligently supervise matters related to its business as a CFTC registrant.

The agency alleged that some of the same supervisory personnel responsible for ensuring compliance with CIBC’s policies and procedures also used the non-approved methods of communication identified to engage in business-related communications.

The firm agreed to pay a $30m penalty to the commodities regulator.

Two commissioners dissent in Qatalyst

Questions remain about Qatalyst getting caught in this round of sweeping enforcement actions involving electronic communication recordkeeping violations.

Despite Qatalyst dodging a potential fine, Commissioners Peirce and Uyeda dissented against the order because they believe that in these recordkeeping cases “it does not appear that firms have an achievable path to compliance.”

The two commissioners outline how a better approach — with ample compliance officer input from the industry — could be devised, if only the SEC would embark on it.

Peirce and Uyeda went on to say “we voted no on Qatalyst Partners LP, and urge our colleagues to reconsider our current approach to the off-channel communications issue.”

The two commissioners provided details of all the compliance steps Qatalyst took back in 2008 when Qatalyst personnel were advised that the use of unapproved electronic communications methods, including on their personal devices, was not permitted. The firm’s policies clearly stated that its employees should not use personal email, chats or text messaging applications for business purposes, or forward work-related communications to unapproved applications on their personal devices.

Furthermore Peirce and Uyeda noted that “Qatalyst reinforced its policies at least annually with regular, mandatory training and reinforcement from compliance and senior management. Qatalyst personnel were specifically advised not to list personal phone numbers in email signatures”.

The business provided its staff with a compliant text-messaging process that could retain the business communications and required personnel to have firm-issued devices, plus it trained employees, monitored the communications coming through the firm-approved modalities and disciplined those who violated the firm’s policies.

Uyeda and Peirce cannot believe that this pro-active approach to compliance by the firm was not enough to avoid and SEC enforcement order – even one carrying no money penalty.

Their dissents are incredibly interesting because both commissioners started out being supportive of these types of recordkeeping cases, with Uyeda seeming to grow concerned enough to start speaking about them at conferences last year.

Peirce spoke to GRIP in a podcast last year with the conversation focused on the compliance profession and her agency’s initiatives. She was also supportive of these efforts, noting that the SEC’s important investigative work is impeded by improper and incomplete recordkeeping practices.

But it seems she has perhaps grown both weary and wary now that they have started to include firms like Qatalyst – businesses that have displayed definitive compliance efforts in this arena, including adopting technology solutions and revising policies and trainings that are deemed best practices – only to still be disciplined by the regulator.

The two commissioners outline how a better approach – with ample compliance officer input from the industry – could be devised, if only the SEC would embark on it.

Rule violations

The firms charged by the SEC in this sweep action were accused of violating:

• SEC Rule 17a-4(b)(4), and/or
• Rule 204-2(a)(7), covering recordkeeping failures; and
• SEC Rule 17a-4(b)(4), covering supervisory failures.

In its parallel action, the CFTC accused CIBP of violating:

• CFTC Regulations 23.201(a) and 23.202(a)(1), which require swap dealers to keep daily trading and counterparty records, and
• Section 4s(h)(1)(B) of the CEA, which requires “diligent supervision of the business of the registered swap dealer.”