History Repeating Itself: The Ongoing Challenge of Record-Keeping Failures

The financial sector is facing yet another wave of record-keeping failures, and honestly, it’s becoming all too familiar. Recently, the SEC imposed substantial penalties on nine investment advisers and three broker-dealers for their inability to maintain and preserve electronic communications. The total? A staggering $63.1 million in fines, coupled with significant public scrutiny. If your firm isn’t reevaluating its compliance practices after this, you might be setting yourself up for trouble.

The Ubiquity of Off-Channel Communications

In today’s fast-paced environment, off-channel communications—such as texts, personal emails, and messaging apps—are rampant. Employees often turn to these platforms because they are quick, easy, and, at times, more convenient than official channels. However, this convenience can come at a steep price, potentially costing your firm millions and damaging its reputation. Let’s explore why this issue is critical and how to ensure your firm doesn’t become the next headline.

The SEC’s latest enforcement actions highlighted a troubling trend: personnel across all levels, including supervisors and senior managers, were using unapproved communication channels for business discussions. Major firms like Blackstone, Kohlberg Kravis Roberts, and Charles Schwab faced penalties ranging from $600,000 (for PJT Partners, which self-reported) to $12 million. These failures not only pointed to poor record-keeping but also hindered the SEC’s ability to investigate and hold firms accountable.

Understanding the Legal Requirements

Federal securities laws mandate that firms maintain and preserve all business-related communications. This is not optional. Whether you’re governed by the Investment Advisers Act or the Securities Exchange Act, the rules are clear: if it’s a record, you must keep it.

When employees resort to unapproved methods like WhatsApp or personal emails, they generate records that the firm fails to capture. And when the SEC comes calling, those missing records can become a major liability.

Common Pitfalls to Avoid

1. Prioritizing Convenience Over Compliance: Employees often favor the ease of texting or personal emails. However, if those messages aren’t captured, you’re in violation—plain and simple.
2. Neglecting Supervision: Supervisors and senior managers may assume their teams are adhering to the rules. Here’s the reality: they often aren’t. If you aren’t actively monitoring and enforcing policies, you share the blame.
3. Insufficient Policies and Training: A flimsy one-page policy hidden in the employee handbook won’t suffice. Your team needs ongoing, clear training to understand the stakes involved.
4. Overlooking Personal Devices: Failing to regulate the business use of personal devices opens the door to non-compliance. Texts, messaging apps, and personal email accounts can become hotbeds for record-keeping failures.

Steps to Enhance Compliance

If you want to steer clear of becoming the SEC’s next target, it’s time to get serious about compliance. Here’s how:

• Enforce Approved Channels
  Clearly communicate that business-related communications must occur only on approved systems. No exceptions.
• Capture and Archive Everything
  Invest in technology that captures and archives all communications—whether emails, texts, or social media messages. If you can’t produce it for the SEC, it doesn’t exist.
• Train, Train, Train
  Ensure your team is well-versed in the rules. Regular training sessions are crucial.
• Monitor and Audit Regularly
  Don’t set policies and forget them. Regularly monitor communications, conduct audits, and take swift action if violations arise.
• Document Everything
  If it’s not documented, it didn’t happen. Keep meticulous records of policy changes and employee training to demonstrate compliance to the SEC.

The SEC is not taking these matters lightly, and neither should you. Off-channel communications pose a significant risk to your firm. Don’t wait for the SEC to knock at your door. Take charge now, enforce your policies, and invest in the necessary tools and training to maintain compliance.

At My RIA Lawyer, we specialize in guiding firms through these compliance challenges. From implementing effective record-keeping systems to providing training and audits, we’re here to support you.

Don’t let mistakes related to off-channel communication cost you millions. Contact us today to take control of your compliance efforts!