The American Securities Association (ASA) has filed suit in US District Court in Florida to force the SEC to turn over enforcement documents detailing how it arrived at the $1.6 billion in penalties it levied against broker-dealers for their recordkeeping failures over the past couple of years.

The ASA represents some of the largest regional broker-dealers in the country, said that it has decided to sue because the SEC has refused to disclose its enforcement records showing penalty calculations and other pertinent information in response to three Freedom of Information Act (FOIA) requests the ASA made in March.

The ASA’s lawsuit comes amid heightened industry criticism, judicial action and lawmaker scrutiny of the securities watchdog.

FOIA request

The FOIA request asks the agency to produce all records regarding its “recordkeeping sweep initiative,” including all information used to calculate, determine and propose penalties, fines and other sanctions associated with the sweep.

According to the lawsuit, the agency citied an exemption to FOIA for requests that could be expected to interfere with law enforcement proceedings, but “did not explain why the Exemption applied or why it justified a blanket withholding of every responsive document,” ASA said.

Refresher on the recordkeeping fines

In September 2021, the SEC began to investigate certain broker-dealers’ retention of “off-channel” communications, such as text messages on personal devices, and it continued its enforcement activity through February of this year.

“There appears to be no rhyme or reason for how the SEC imposed these penalties, and the SEC has provided little explanation into its decision-making.”

The ASA, in its lawsuit against the SEC

In one of its largest settlements that was announced in September 2022, the SEC said 15 broker-dealers and one affiliated investment adviser would pay $1.1b over charges of “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.”

Gurbir S Grewal, the director of the SEC’s Division of Enforcement, said at the time about these settlements with these particular firms (including BofA Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Citigroup Global Markets Inc.; and Goldman Sachs & Co. LLC): “Today’s actions – both in terms of the firms involved and the size of the penalties ordered – underscore the importance of recordkeeping requirements: they’re sacrosanct.”

Why them, how targeted and why those fines?

According to the ASA’s lawsuit, the SEC began investigating certain broker-dealers’ retention of off-channel communication records, such as text messages, by demanding “scores of documents from numerous companies without any suspicion that they violated the SEC’s rules.”

More specifically, the agency ”launched a suspicion-less investigation into whether certain broker-dealers were properly retaining business-related text messages sent and received on personal devices as required by the Commission’s rules,” the lawsuit states. The investigations also went on during the Covid-19 years, when many employees were forced to work from home, the ASA said.

“There appears to be no rhyme or reason for how the SEC imposed these penalties, and the SEC has provided little explanation into its decision-making,” ASA said in the suit.

“The regulated community thus is left with many questions. How were these penalties calculated? And why were they targeted in the first place? Or, as two SEC Commissioners recently put it, is the SEC’s penalty regime simply ‘a tool to generate numbers for year-end statistics’ rather than ‘a means to achieve outcomes that enhance market integrity and investor protection?’”

“The purpose of the Freedom of Information Act is to ensure the public has access to information in the possession of federal agencies so the people can hold their government accountable,” ASA president and CEO Chris Iacovella said Thursday in a statement. “Unfortunately, the SEC has failed to comply with its FOIA obligations, and that is why ASA filed this lawsuit. The American public must have transparency into the SEC’s enforcement process.”

The public needs to know why, ASA says

Instead of producing the documents listed in the FOIA request, the SEC has pointed to exemptions when the disclosures could “reasonably be expected to interfere” with ongoing or prospective enforcement proceedings.”

“But the SEC concedes that ASA is seeking documents from settled proceedings,” the trade group said in its lawsuit. The trade group argues that the SEC cannot withhold documents simply because it may bring different enforcement proceedings against other, unrelated entities. “Such an outcome would license agencies to withhold documents in perpetuity,” the ASA said.

All agencies of the US government are required to disclose records upon receiving a written request for them, except for records that are exempt from public disclosure.

The SEC records will help the public understand how and why the SEC brought the fines it did, the trade group argued.

“After the dust settles, those who were targeted by the SEC are left to wonder how it all happened. Why did the SEC choose to target certain companies for suspicion-less investigations? How did the SEC arrive at the penalties it imposed?” the ASA asked in its complaint.

The ASA is seeking to force the SEC to turn over the documents and pay its attorneys’ fees.

FOIA is codified under law at 5 U.S.C. 552(a), and the law promotes transparency in government by providing any person with the right to request access to federal agency records. All agencies of the US government are required to disclose records upon receiving a written request for them, except for records that are exempt from public disclosure.