SEC Enforcement Action: Recordkeeping and Code of Ethics Violations

What Happened?

Last week, the SEC charged a $3 billion RIA with a $6.5 million penalty. The adviser failed to preserve electronic communications, as well as failed to enforce its own Code of Ethics. The SEC’s investigation revealed widespread violations over the course of 2019 and 2021. Let’s dive in:

Key Takeaways

• Recordkeeping Violations:

  • Employees at various levels of authority conducted business communications on texting platforms and other non-approved applications that were not being archived.

  • Some employees’ personal devices were set to automatically delete messages after 30 days, which prevented the recovery of messages required to be archived.

• Code of Ethics Violations:

  • Employees violated the Code of Ethics by failing to obtain pre-clearance for all personal trading, which their policies required.

  • The adviser failed to ensure required personal-trading reviews were conducted in compliance with the firm’s policies.

• Failed to Implement Policies and Procedures to Prevent and Detect Violations:

  • Although the adviser had written policies and procedures, employees still certified that they would abide by their compliance manual and failed to follow the correct procedures.

• Remediation:

  • The firm agreed to:

    • Pay a $6.5 million penalty;

    • Retain a compliance consultant;

    • Conduct comprehensive reviews of its electronic communications retention;

    • Review the framework for addressing non-compliance by its employees.

CCG’s Guidance

• Advisers should ensure all business communications are done on approved platforms that are being archived correctly, including removing the auto-delete function inherent to many messaging applications.

• Advisers should maintain policies and procedures that are accompanied by periodic and comprehensive internal reviews to proactively ensure implementation and enforcement of compliance activities.

In an ever-changing regulatory landscape, preparation is key. The SEC’s focus on communications recordkeeping serves as a reminder of the volume, velocity, and complexity of the new enforcement focuses of the SEC.

If you're looking to enhance your compliance program, contact us to learn more about how we can help you!