In a decision rendered in the final days of the Gary Gensler-led SEC (he steps down on January 20), the agency announced multi-million dollar penalties for investment advisors and broker dealers resulting from recordkeeping failures.

A combined $63.1m in fines were handed out to 12 firms – nine investment advisors and three broker-dealers – to settle charges resulting from firms failing to maintain and preserve electronic communications. 

The SEC investigations found use of off-channel communication methods in each of the cases, and the failures to ensure compliance involved personnel of all levels of authority including supervisors and senior managers.

One of the firms self-reported to the SEC and received a penalty of $600,000 rather than the far larger fines (ranging from $4m to $12m) paid by the others. All of them have begun implementing improvements to their compliance policies and procedures to address these violations. 

The SEC began its risk-based initiative to investigate whether broker-dealers were properly retaining business-related messages sent and received on personal devices in September 2021.

Books, records and ecomms

The firms that were charged in this January 2025 round-up were as follows:

• Blackstone Alternative Credit Advisors LP, with Blackstone Management Partners LLC and Blackstone Real Estate Advisors LP – combined $12m penalty;
• Kohlberg Kravis Roberts & Co LP – $11m penalty;
• Charles Schwab & Co, Inc – $10m penalty;
• Apollo Capital Management LP – $8.5m penalty;
• Carlyle Investment Management LLC, with Carlyle Global Credit Investment Management LLC, and AlpInvest Partners BV – combined $8.5m penalty;
• TPG Capital Advisors LLC – $8.5m penalty;
• Santander US Capital Markets LLC – $4 million penalty; and
• PJT Partners LP, which self-reported – $600,000 penalty.

The investment advisory firms were charged with violating SEC Rule 204-2(a)(7) of the Advisors Act and the broker-dealers were charged with violating SEC Rule 17a-4(b)(4) under the Securities Exchange Act.

The resounding message from the cases themselves was that these businesses failed to implement sufficient monitoring to ensure that their recordkeeping and communications policies were being followed.

In the SEC’s press release, Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, said: “In order to effectively carry out their oversight responsibilities, the Commission’s Examinations and Enforcement Divisions must, and indeed do, rely heavily on registrants complying with the books and records requirements of the federal securities laws. When firms fall short of those obligations, the consequences go far beyond deficient document productions; such failures implicate the transparency and the integrity of the markets and their participants, like the firms at issue here.”

Credit for self-reporting

The SEC said PJT Partners in February 2024 voluntarily contacted agency staff regarding off-channel communications related to its broker-dealer business. PJT Partners cooperated with the staff’s investigation by proactively gathering information and documents concerning the underlying conduct and responding to the staff’s requests for additional information.

Prior to approaching the SEC staff, PJT Partners had already increased compliance efforts, which included testing and implementing an application on employee devices to help keep messaging on-channel and increasing the frequency of electronic communications training for employees. PJT Partners also implemented a process for employees to easily onboard and preserve any off-channel communications that had already taken place.

Undertakings by all firms

The firms must all conduct an internal audit within 180 days of entry of their signed orders that comprises a comprehensive review of their supervisory, compliance, and other policies and procedures designed to ensure that the firm’s electronic communications, including those found on personal electronic devices, are preserved in accordance with the requirements of the federal securities laws.

The businesses must also conduct a comprehensive review of training designed to ensure personnel are complying with the requirements regarding the preservation of electronic communications, including those found on personal devices, in accordance with the requirements and a review of their in-house requirements that their personnel certify in writing on a periodic basis that they are complying with preservation requirements.

Additionally, they must assess their surveillance program measures implemented to ensure they are designed to achieve compliance with the requirements found in the federal securities laws to preserve electronic communications, including those found on personal devices. And review the technology solutions they are using meet these record-retention requirements.

And, last but not least, the businesses needed to detail the individual disciplinary measures meted our to personnel. Specifically, the SEC said the review should include details of the corrective action carried out, an evaluation of who violated the policies and procedures and why, what penalties were imposed, and whether penalties were handed out consistently across business lines and seniority levels.

Recordkeeping enforcement going forward

To date, SEC has obtained over $2 billion in penalties from more than 100 firms for recordkeeping violations involving off-channel communications. (We maintain a regularly updated, complete list of recordkeeping fines and actions.) The earlier settlements were unanimously approved, but by mid-2024, Republican Commissioners Hester Peirce and Mark Uyeda started objecting to the penalties and undertakings in most off-channel cases. 

Basically, the two commissioners objected to the settlement order’s suggestion that reasonable policies must achieve perfection, leaving firms with no achievable path to compliance. 

In their late-2024 dissents, they suggested SEC staff would chart a different path forward, and Peirce told GRIP in a podcast in November that these instances of off-channel recordkeeping lapses illustrated an industry-wide problem that was best solved through avenues other than enforcement, such as education, collaboration with regulators and technology partners, and more effective surveillance techniques.

But even if a continued wave of off-channel enforcement actions with large civil monetary penalties is unlikely, the issue remains on business’s radar. This is for several reasons. First, a thorough approach to maintaining good stewardship over communication records such as text messages and emails is one of the best ways to do the surveillance required of businesses under securities law when it comes to monitoring for misconduct of all types.

And preserving these communications can help businesses have better insight into how their personnel handle everything from sales, to vulnerable investors, to trades of complex securities, to transactions whose timing suggests insider trading.

And, not least of all, some of these communications could be used to defend the company against certain allegations, which is why, for legal discovery purposes, we have always cared about this archiving stuff.