The SEC has announced charges against New York-based registered investment adviser Senvest Management LLC for widespread and longstanding failures to maintain and preserve certain electronic communications.

The SEC also charged Senvest with failing to enforce its code of ethics. In settling with the securities regulator, Senvest admitted the facts set out in the SEC’s order, acknowledged that its conduct violated the federal securities laws, and agreed to pay a $6.5m penalty and to implement improvements to its compliance policies and procedures.

According to the SEC’s order, from at least January 2019 through December 2021, Senvest employees at various levels of authority communicated about company business internally and externally using personal texting platforms and other non-Senvest messaging applications in violation of the firm’s policies and procedures. The SEC called the violations “widespread” and “longstanding.”

Senvest also failed to maintain or preserve the off-channel communications as required under the federal securities laws and the firm’s policies and procedures.

Allegations

From at least January 2019 through December 2021, the SEC said Senvest employees at various levels of authority communicated about Senvest-related business internally and externally using personal texting platforms and other non-Senvest electronic communication services (“off-channel communications”) in violation of the firm’s policies and procedures. As a result, Senvest did not keep the substantial majority of these communications, including those it was required to keep under the Advisers Act.

The SEC said Senvest revised its policies and procedures to say that employees have now been issued firm-issued cell phones to reduce opportunities for off-channel communications.

The SEC said:

• Senvest supervisors, who were responsible for preventing such conduct by junior employees and for implementing the firm’s policies and procedures, also discussed Senvest business using off-channel communications. For example, three senior employees engaged in such discussions on personal devices set to automatically delete messages after 30 days. These automatic deletions prevented Senvest from recovering certain messages that it was required to keep under the Advisers Act and the firm’s policies and procedures.
• The messages reflected discussion between and among Senvest’s senior officers, managing directors, employees, fund investors, and other financial-industry participants.
• During this period, Senvest responded to record requests and document subpoenas from the Commission. The firm’s recordkeeping failures could have affected the Commission’s ability to carry out its regulatory functions and investigate violations of the federal securities laws.
• Certain Senvest employees also failed to adhere to provisions of the firm’s code of ethics requiring them to obtain pre-clearance for all securities transactions in their personal accounts. Senvest supervisors failed to ensure that certain required personal-trading reviews were conducted in a timely manner in compliance with the firm’s pre-clearance policy.

Pre-clearance policy violations

The SEC included Senvest’s preclearance policy violations in this settlement order, noting that Senvest failed to enforce the policies and procedures contained in the code of ethics section of its compliance manual requiring employees to obtain pre-clearance for all personal securities transactions and requiring supervisory review of employees’ quarterly transaction and holdings reports.

Between January 2019 and January 2021, certain Senvest employees traded securities in personal accounts without obtaining pre-clearance. In one quarter in 2020, for example, a managing director engaged in numerous securities transactions in a personal account without pre-clearance, including transactions in a security owned by a Senvest-managed fund.

Senvest’s remedial efforts

The SEC said Senvest revised its policies and procedures to say that employees have now been issued firm-issued cell phones to reduce opportunities for off-channel communications. These devices automatically upload communications into Senvest’s archiving system for retention.

The firm has also prohibited option trading in employee accounts and notified employees that making more than 10 pre-clearance trades in a month may trigger increased scrutiny, and prohibited employees from trading in positions owned by the firm’s clients, absent exceptional circumstances.

Senvest agreed to undertake the remedial and reporting undertakings other firms have agreed to in this line of off-channel communication recordkeeping cases. The company will employ a compliance consultant who will submit a detailed report of the company’s remedial efforts and provide a one-year evaluation; keep records of these compliance undertakings for six years; and certify, in writing, compliance with the undertakings.

Off-channel comms cases at SEC Speaks

Presented in cooperation with the SEC, the Practising Law Institute’s annual SEC Speaks event provides an update on the current initiatives and priorities at the agency.

Speaking at the event held last week were the SEC’s chair and commissioners, plus senior staff at the Divisions of Investment Management, Trading and Markets, Corporation Finance, Enforcement, Examinations, and Economic and Risk Analysis, and the Offices of the Chief Accountant, General Counsel.

Deputy Director of Enforcement at the SEC, Sanjay Wadhwa, described his agency’s approach to penalties in a general sense by focusing on the 60 firms fined for off-channel communications recordkeeping cases.

Such recordkeeping protocols are now a standard checklist item for the agency in its evaluations of firms’ compliance and risk postures.

Wadhwa said he was doing so because of the wide range in penalties in the cases, assuring critics from the defense bar that the SEC does not make an individualized assessment of each firm and picks penalty numbers at random.

But the choice of focusing on these cases in detail also showcases the emphasis and attention the regulator continues to pay to these cases, and its effort to use this particular sweep of enforcements to explain its mandate. The agency cannot begin to do its job as an examiner of registrants and enforcer of regulations to protect investors and the market as a whole if essential business records are not preserved.

The SEC and many of its division leaders continue to go back to this line of enforcement actions to make the point about how correctly handling these fundamentals is a standard and strict requirement.

In other words, such recordkeeping protocols are now a standard checklist item for the agency in its evaluations of firms’ compliance and risk postures.

Senvest says on its website that it is is a registered investment advisor founded by Richard Mashaal in 1997 “and employs a contrarian, value-based investment strategy across approximately $3 billion in assets under management”.

• See our full list of recordkeeping fines and actions since 2022