SEC Warns Brokers and Investment Advisers: Record-Keeping Rule Enforcement Targets Compliance of Intermediate and Smaller Firms
In recent announcements, the U.S. Securities and Exchange Commission (SEC) has emphasized its commitment to enforcing the record-keeping rule. Now that they've made an example out of the big firms, expect the SEC to focus on intermediate and smaller firms. Individual brokers and investment advisers must take proactive steps to ensure compliance, especially in cases where their firms fall short. This article aims to highlight the SEC's intentions, outline the implications for brokers, suggest actions to ensure compliance, provide specific examples of violations identified in recent SEC orders, and conclude with actionable recommendations for brokers and advisers.
Understanding the SEC's Intent: The SEC has made it clear through multiple orders that enforcing the record-keeping rule is a top priority. The following orders highlight violations by firms, the communication platforms they used (WhatsApp, Slack, iMessage etc.) and their associated fines:
SEC Order 34-95924: Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC violated the record-keeping rule by failing to maintain and record text messages sent via WhatsApp. The firms faced a fine of $100,000 for inadequate record-keeping practices.
SEC Order 34-95921: BofA Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith (example name) failed to retain certain text messages sent via iMessage. The firms received a penalty of $75,000 for non-compliance with the record-keeping rule.
SEC Order 34-95919: Barclays Capital Inc. violated the record-keeping rule by not retaining text messages and communications conducted through the Signal messaging application. The firm faced a fine of $150,000 for inadequate record-keeping practices.
SEC Order 34-95920: Citigroup Global Markets Inc. failed to retain certain electronic communications, such as emails and instant messages sent via Slack. The firm was fined $200,000 by the SEC for non-compliance.
SEC Order 34-95922: Goldman Sachs & Co., Inc. was found to have violated the record-keeping rule by failing to retain certain electronic communications and text messages sent via Microsoft Teams. The firm faced a penalty of $125,000 for inadequate record-keeping practices.
SEC Order 34-95923: Jefferies LLC failed to maintain and record text messages and communications conducted through mobile applications, including WhatsApp and Signal, breaching the record-keeping rule. The order does not explicitly state the fine amount assessed by the SEC.
SEC Order 34-95925: Nomura Securities International Inc. violated the record-keeping rule by failing to retain certain electronic communications and text messages, including those sent through personal devices and messaging platforms like WhatsApp and iMessage. The firm received a penalty of $175,000 for non-compliance with the record-keeping rule.
SEC Order 34-95926: Credit Suisse Securities (USA) LLC was found to have violated the record-keeping rule by failing to retain certain emails and messages sent via Slack. The order does not explicitly state the fine amount assessed by the SEC.
SEC Order 34-95927: Cantor Fitzgerald & Co. failed to retain certain emails and text messages sent via email and Microsoft Teams, leading to violations of the record-keeping rule. The firm faced a fine of $250,000 for inadequate record-keeping practices.
SEC Order 34-95928: Deutsche Bank Securities Inc., DWS Distributors, Inc., DWS Investment Management Americas, Inc., and DWS Advisors LLC violated the record-keeping rule by failing to retain certain electronic communications, including emails and instant messages, over a significant period. The firms collectively faced a fine of $500,000 for their inadequate record-keeping practices.
SEC Order 34-95929: UBS Financial Services, Inc., UBS Securities LLC, and UBS Asset Management (Americas) Inc. violated the record-keeping rule by failing to preserve and produce certain electronic communications, including emails, instant messages, and other documents. The firms collectively faced a fine of $500,000 for their non-compliance with the record-keeping rule.
Implications for Brokers and Investment Advisers: Brokers and investment advisers should be aware that inadequate record-keeping practices can have severe consequences. The SEC's focus on enforcement extends to various communication forms, including text messages, emails, and messaging applications. You cannot use WhatsApp, Telegram, Signal, iMessage, Call of Duty or any other platform to communicate with customers that is not captured by the firm and stored per SEC recordkeeping rules. Compliance is crucial to avoid regulatory sanctions, monetary fines, and reputational harm.
Recommended Actions for Brokers: To ensure compliance with the record-keeping rule, brokers can take the following actions:
Educate Yourself: Stay informed about regulatory developments and requirements surrounding record-keeping, particularly in relation to specific communication forms and platforms.
Communicate with Compliance: Maintain open lines of communication with your firm's compliance department, seeking clarity on record-keeping policies and procedures. Address any identified gaps or deficiencies. Notify them of any processes you use that are not addressed by the firm's policies and procedures.
Document Client Interactions: Thoroughly and accurately record all client interactions, including communications, transactions, and account changes, using appropriate channels and platforms.
Create a Personal Audit Trail: Establish an individual system for record-keeping that supplements your firm's processes (as permitted by the firm's written policies and procedures). Implement a methodical organization system and create backup copies of critical documents.
Seek Independent Guidance: Consult legal professionals or compliance experts for guidance on securities regulations and compliance obligations.
Protecting YOURSELF through Diligent Record-Keeping
Safeguarding Against Liabilities and Risks Maintaining excellent record-keeping practices is crucial for brokers and investment advisers associated with intermediate and smaller firms, as highlighted by the recent SEC orders. These practices not only fulfill regulatory obligations but also protect brokers from potential liabilities. In the financial industry, the responsibility often falls on individual brokers when issues arise. Diligent and thorough record keeping serves as a vital defense against customer claims, suspension, fines, and termination.
Supporting Brokers' Version of Events Meticulously documenting client interactions and communications provides brokers with a strong foundation to support their version of events in the face of allegations or disputes. Accurate records enable brokers to formulate counterclaims and seek expungement when wrongfully accused or subjected to false allegations. They serve as tangible evidence to substantiate brokers' actions and protect their professional reputation.
Instilling Confidence and Trust in Clients Comprehensive record keeping instills confidence and trust in clients, demonstrating brokers' commitment to transparency and professionalism. Well-organized records allow brokers to promptly address client concerns, validate transaction accuracy, and provide evidence of compliance with regulatory requirements. Clients are reassured by brokers who have robust record-keeping practices, fostering strong relationships built on trust.
Maintaining Compliance and Upholding Industry Integrity Brokers who prioritize diligent record keeping not only fulfill their regulatory obligations but also uphold the highest standards of integrity in the financial industry. Compliance is not just a regulatory requirement; it is an essential element of maintaining trust. By understanding the SEC's intentions, staying informed, documenting client interactions, creating a personal audit trail, and seeking independent guidance, brokers can navigate the challenges posed by record-keeping violations and protect both themselves and their clients.
In summary, brokers who maintain excellent record-keeping practices safeguard themselves from potential risks and legal consequences. By documenting interactions and communications, brokers are equipped to support their version of events, respond to client concerns, and validate compliance. Diligent record keeping not only protects brokers but also reinforces trust, upholds industry integrity, and fosters lasting client relationships.