Recordkeeping Failures: An Evergreen Source of Regulatory Penalties
On September 24, 2024, the SEC announced charges against 12 firms, several of which were investment advisers, for violations of recordkeeping requirements, leading to the imposition of $88,225,000 in combined penalties. The SEC investigations uncovered “use of unapproved communication methods” (otherwise known as “off-channel communications”), a recurring theme in regulatory actions for the past decade. Due to the proliferation of personal devices and novel methods of electronic communication in the modern era, firms face an uphill battle enforcing their electronic communications policies. All it takes is one rogue employee to befall even the most diligent firm with air-tight policies and procedures in place and a strong culture of compliance. It’s this inconvenient reality that justifiably remains an evergreen source of concern for firms.
Perhaps the most revelatory part of this announcement is that amidst these twelve firms stood one firm that did not incur any financial penalties: Qatalyst Partners LP. Unlike the other cited firms, Qatalyst not only self-reported its violations but also cooperated with the SEC’s investigation and “demonstrated substantial efforts at compliance with the recordkeeping requirements” due to the firm’s multi-year continued focus on training, employee censures for violations (including censures of senior staff), technological solutions, and stringent supervision. While two other firms also self-reported their violations, they did face financial penalties, albeit penalties that were significantly lower than what they would have otherwise faced.
The key takeaways here? Ensure that you have a robust compliance program that properly addresses recordkeeping requirements. Devote sufficient resources to archiving solutions that make it easy for employees to comply with internal recordkeeping policies. Instead of turning a blind eye and hoping for the best, set up a supervision framework that allows the firm to investigate employee compliance. When violations turn up, censure employees without regard to their status at the firm (i.e., don’t refrain from censuring senior employees – no one should be “above the law”) and strongly consider self-reporting. Provide regular trainings to employees addressing recordkeeping and electronic communications and require employees to submit related attestations. Nurture a strong culture of compliance from the top-down. It is important for the firm to communicate, and to illustrate in practice, that noncompliance will not be tolerated.
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