The Securities and Exchange Commission (SEC) on Feb. 9 announced charges against 16 firms for what the Commission described as “widespread and longstanding failures” by the firms and their employees to maintain and preserve electronic communications.
According to the SEC’s announcement, the firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, and agreed to pay combined civil penalties of more than $81 million.
As such, the firms were charged with violating certain recordkeeping provisions of either the Securities Exchange Act of 1934 or the Investment Advisers Act of 1940, and with failing to reasonably supervise with a view to preventing and detecting those violations. In addition, the firms apparently have begun implementing improvements to their compliance policies and procedures to address these violations.
The 16 firms were comprised of five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers. They included the following:
- Northwestern Mutual Investment Services, together with Northwestern Mutual Investment Management Co. and Mason Street Advisors (collectively, Northwestern Mutual), agreed to pay $16.5 million;
- Guggenheim Securities, together with Guggenheim Partners Investment Management, agreed to pay $15 million;
- Oppenheimer & Co. agreed to pay $12 million;
- Cambridge Investment Research, together with Cambridge Investment Research Advisors, agreed to pay $10 million;
- Key Investment Services, together with KeyBanc Capital Markets, agreed to pay $10 million;
- Lincoln Financial Advisors Corporation, together with Lincoln Financial Securities Corporation, agreed to pay $8.5 million;
- U.S. Bancorp Investments agreed to pay $8 million; and
- The Huntington Investment Company, together with Huntington Securities and Capstone Capital Markets (collectively, Huntington) agreed to pay $1.25 million.
The SEC notes that because Huntington self-reported, it was ordered to pay lower civil penalty than other firms.
“Today’s actions against these 16 firms result from our continuing efforts to ensure that all regulated entities comply with the recordkeeping requirements, which are essential to our ability to monitor and enforce compliance with the federal securities laws,” Gurbir Grewal, Director of the SEC’s Division of Enforcement, said in a statement. “Once again, one of these orders is not like the others: Huntington’s penalty reflects its voluntary self-report and cooperation.”
The SEC further notes that its investigations uncovered “pervasive and longstanding uses of unapproved communication methods,” known as off-channel communications, at all 16 firms. As described in the SEC’s orders, the broker-dealer firms admitted that, from at least 2019 or 2020, their employees communicated through personal text messages about the business of their employers.
The investment adviser firms admitted that their employees sent and received off-channel communications related to recommendations made, or proposed to be made, and advice given or proposed to be given.
What’s more, the SEC notes that the firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws.
“By failing to maintain and preserve required records, some of the firms likely deprived the SEC of these off-channel communications in various SEC investigations. The failures involved employees at multiple levels of authority, including supervisors and senior managers,” the SEC stated in its announcement.
In addition to the financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and was censured. The firms also agreed to retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures.
