Published on Apr 9th, 2024 |

SEC RELEASES

Introduction

On April 3rd, the SEC announced charges against a Registered Investment Adviser (“RIA”) for “widespread and longstanding failures” regarding the recordkeeping of electronic communications. In addition, the Firm was also charged with failing to enforce its Code of Ethics.

They were required to pay a $6.5 million fine and implement notable improvements to their Compliance Program.

At a time of record-breaking enforcement by the SEC, recordkeeping failures have been a frequent target of the Division of Enforcement.

What Happened?

What Happened?

According to the SEC:

  • The policies of the RIA required the Firm to “retain all electronic communications that it sends and receives”, and strictly prohibited the use of outside messaging apps that would not properly record communications.
  • Employees of the Firm acknowledged annually that they would abide by the Firm’s Compliance Manual and Code of Ethics.
  • From at least January 2019 through December 2021, employees of the Firm at all levels of authority utilized personal texting and non-company messaging platforms to discuss company business both externally and internally.
  • The Firm failed to maintain or preserve these communications as required by regulators and the Firm’s own Policies and Procedures.
    • Some executives had their devices set to delete messages every 30 days.
  • Employees also failed to follow the Firm’s Code of Ethics regarding obtaining pre-clearance for securities transactions in their personal accounts.
  • The Firm agreed to implement a two-phone policy.

Vigilant's Conclusion

Vigilant’s Conclusion

This most recent recordkeeping enforcement has many similarities to previous enforcements, except that this RIA had Policies and Procedures related to recordkeeping that better resembled those of Broker Dealers.

The recordkeeping requirements for RIAs that are not affiliated with Broker Dealer are not the same, and the SEC did not make it clear which communications would have been okay to not record.

As Firms work towards better recordkeeping, it is important to ensure that any auto-delete functions available in many messaging apps are removed.

This enforcement is yet another reminder that having written Policies and Procedures will not limit the risk of regulatory burdens if there is no implementation or enforcement.

Please reach out to us with any questions related to this enforcement, and what steps your Firm can take to mitigate this risk.

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