The SEC has charged 26 broker-dealer, investment adviser and dually registered firms $392.75m in combined civil penalties for “widespread and longstanding” failures to maintain and preserve electronic communications that their employees sent and received.

Each of the firms admitted to engaging in conduct that “violated recordkeeping provisions of the federal securities laws,” the SEC wrote in its announcement about its latest sweep in off-channel recordkeeping charges and fines.

The SEC said all of the firms have begun implementing improvements to their compliance policies and procedures to address these violations, although the agency was quick to point out which firms went above and beyond in their prompt remedial efforts.

Regardless of cooperation, every firm must retain a compliance consultant to conduct a comprehensive review of their supervisory, compliance, and other policies and procedures designed to ensure relevant electronic communications are preserved in accordance with federal securities laws.

Truist, TD Bank and Cowen also received penalties from the Commodity Futures Trading Commission (CFTC), alongside those from the SEC.

Firms included in SEC sweep

We have published a complete tally of all of the off-channel recordkeeping cases going back over two years now, which now includes all these most recent actions.

The steepest penalties in this August round-up of enforcement went to some of the largest US financial services firms, including: 

• Ameriprise Financial Services, LLC ($50m);
• BNY Mellon Securities Corporation, with Pershing LLC ($40m);
• Cetera Advisor Networks LLC and Cetera Investment Services LLC ($4.5m)
• Edward D. Jones & Co, L.P. ($50m);
• LPL Financial LLC ($50m);
• Osaic Services, Inc. and Osaic Wealth Inc ($18m);
• Raymond James & Associates, Inc ($50m);
• RBC Capital Markets, LLC ($45m); and
• TD Securities (USA) LLC, with TD Private Client Wealth LLC and Epoch Investment Partners, Inc. ($30m).

The other firms charged are:

• Apex Clearing Corporation,
• Cowen and Company LLC (with Cowen Investment Management LLC);
• First Trust Portfolios L.P.;
• Great Point Capital LLC;
• Haitong International Securities (USA) Inc;
• Hilltop Securities Inc;
• P. Schoenfeld Asset Management L.P.;
• Piper Sandler & Co, and
• Truist Securities, Inc (with Truist Investment Services, Inc. and Truist Advisory Services, Inc.)

According to the SEC all of these firms will pay combined civil penalties of $392.75m.

The recordkeeping infractions

Each of the firms were charged with violating certain recordkeeping provisions of the Securities Exchange Act (SEC Rule 17a-4(b)(4)), the Investment Advisers Act SEC Rule 204-2(a)(7)), or both. The firms were also each charged with failing to reasonably supervise their personnel with a view to preventing and detecting those violations, according to the SEC.

Each order described the nature and extent of the recordkeeping failures the SEC was alleging, with some nuance apparent between the businesses and the nature of their alleged violations of both their own internal policies as well as regulatory requirements.

Some of the SEC’s observations revolved around businesses failing to implement sufficient monitoring to ensure their own recordkeeping and communications policies were being followed. And the SEC alleged failures to maintain and preserve large volumes of written communications pertaining to business matters that were delivered “off-channel” – or not on an approved written communications platform.

The securities watchdog also noted supervisory failures, saying in some cases that senior managers and department heads responsible for supervising junior employees themselves failed to comply with the firm’s policies by communicating over such non-firm-approved methods on their personal devices.

Cooperation credit

The SEC noted the steps each firm undertook either before or after the agency approached the SEC staff (or both), noting their remedial measures, internal investigations and investigative findings shared with SEC staff. But three of the firms went beyond those remedial efforts to actually self-report their violations – Cetera Advisor Networks, Hilltop Securities and Truist Securities – and, according to the SEC, they will pay lower civil penalties as a result.

“Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation.”

Gurbir Grewal, SEC Enforcement Director

In one example, the company had self-reported the facts to the SEC and had already begun a program of remediation, which included strengthening its policies and procedures by making investments in new technologies to improve surveillance and retention efforts, and making an on-channel texting platform available to employees. Those efforts also included increasing training cadence, sending firm-wide reminders that emphasized the importance of complying with recordkeeping obligations, and giving corporate mobile devices to executive committee members.

The decision to self-report, cooperate, and remediate, continues to allow registered firms to benefit in the form of a substantially reduced penalty in these types of cases when being held accountable.

Compliance consultant ordered

The SEC ordered each of the firms to engage a compliance consultant to do a comprehensive compliance review of the business’s supervisory, compliance and other policies and procedures designed to ensure compliance with the firm’s and the regulator’s communication recordkeeping and supervisory programs.

The review should include a review of training, an assessment of surveillance measures being taken to ensure compliance, and a review of technological solutions going forward, among other things.

The review should also lead to the firm understanding which personnel failed to comply with the relevant policies and what penalties were imposed, and “whether penalties were handed out consistently across business lines and seniority levels.”

Statements and a dissent

Several corporate spokespeople issued comments on the settlement agreements.

“Edward Jones was one of many firms reviewed by the SEC regarding the retention of electronic communications,” a spokesperson for the firm said. “We cooperated fully with the SEC and are pleased to have resolved this matter. We take this very seriously and have made and will continue to make enhancements to our policies, procedures and practices.”

Similarly, an RBC spokesperson said the company was “pleased to have resolved this matter” and remains “focused on upholding all regulatory requirements and continuing to enhance our compliance protocols.”

An LPL spokesperson also said after cooperating with the SEC’s investigation, the company has “taken proactive steps to enhance our recordkeeping compliance procedures to meet regulatory requirements and the needs of our clients.”

And at the SEC, Gurbir Grewal, director of the SEC’s Division of Enforcement, said the regulator remains “committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets.”

“Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation,” Grewal added.

CFTC Commissioner Caroline Pham dissented in the Cowen and Company case because she said “the administrative record does not include evidence that any CFTC registered Associated Persons (APs) engaged in activity that was in violation of the CFTC’s recordkeeping requirements for introducing brokers.”

She said the CFTC only reviewed sample messages regarding the firm’s FINRA-registered representatives, not any of its CFTC APs.