Core Summary

  • The U.S. Securities and Exchange Commission (SEC) fined 12 investment advisers, broker-dealers, and other financial services firms a total of $88 million for violating securities laws by failing to preserve employees' electronic communications records.
  • The firms involved, including CIBC World Markets, Invesco Distributors, and Stifel, Nicolaus & Company, all admitted to thefacts in the regulatory ordersand have begun improvements to comply with regulatory requirements, the SEC announced on Tuesday.
  • Gurbir Grewal, Director of the SEC's Division of Enforcement, said in a statement: "Widespread and long-standing violations, including those that could impede the Commission's investor protection functions and harm firms' responses to SEC subpoenas, can result in severe civil penalties." He praised firms that proactively "self-reported" deficiencies to the SEC, noting that these firms "may receive substantially reduced penalties."

In-Depth Analysis

Since August 2023, the SEC has publicly criticized more than 40 financial services firms for poor or missing record-keeping practices, imposing fines of up to $125 million.

SEC Chairman Gary Gensler faced criticism from Republican lawmakers at a House Financial Services Committee hearing on Tuesday, who argued that the SEC should address weaknesses in communications record-keeping more through regulation than through enforcement actions.

Republican Representative Ann Wagner of Missouri questioned: "Why didn't the SEC issue a risk alert during the pandemic, when it knew the entire world was increasingly relying on mobile phones for communications amid the sudden forced shift to remote work?" She further pressed: "Why did the SEC wait until after the fact to 'catch' firms through enforcement actions?"

Wagner directed her questions to Gensler and the SEC's other four commissioners, including Hester Peirce, one of the two Republican appointees.

Peirce, responding to Wagner, said: "I think you've pointed out something crucial—many problems may indeed stem from the pandemic changing the world and how we do things, which is exactly why we should have taken a regulatory approach first." She added: "Enforcement of record-keeping laws 'has truly become a cash cow for the SEC,' and typical cases are not based on evidence of fraud or any issue, but merely record-keeping problems. This is a serious issue, but I don't think we should address it first through enforcement, but rather through regulatory efforts."

The SEC said its investigations "found widespread and long-standing use of unauthorized communication methods, so-called 'off-channel communications,' by executives (including supervisors and senior managers) as well as lower-level employees."

Grewal noted that firms that proactively report record-keeping issues to the SEC may face lighter penalties, and in some cases may even avoid fines entirely. For example, Qatalyst Partners took early corrective measures and, despite being named by the SEC, will not pay a fine.

Grewal explained: "Although Qatalyst had record-keeping failures involving senior leadership communications, and these failures persisted after we announced our first record-keeping cases in 2021, the firm took substantial compliance steps, self-reported, and remediated, thus earning a no-penalty resolution."