Navigating compliance: The critical role of record keeping in financial firms

Navigating compliance: The critical role of record keeping in financial firms

In the fast-evolving landscape of financial regulation, the significance of stringent recordkeeping cannot be overstated. Recent enforcement actions by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have underscored this, with fines exceeding $1.5bn handed down to Wall Street firms for recordkeeping violations.

The SEC’s 2024 Division of Examinations Priorities further cements the agency’s focus on the critical nature of maintaining accurate books and records in the face of regulatory scrutiny.

SEC Deputy Director of Enforcement Sanjay Wadhwa, in an August 2023 statement, emphasized the industry-wide issue of non-compliance, stating, “we know that other SEC-regulated entities have committed similar violations, and so our work to enforce industry-wide compliance continues.” The charges levied highlight a pattern of unauthorised app and personal device use for business communications, failure to preserve such communications as mandated by U.S. federal securities laws, and a lack of enforcement of existing communication policies and procedures.

MCO (MyComplianceOffice), which offers a comprehensive compliance software to help mitigate risks, recently delved into why it is vital firms preserve their e-communications. 

February 2024 saw the SEC imposing further penalties amounting to over $81m for record-keeping lapses. These actions involved a range of financial institutions, including broker-dealers and investment advisers, indicating a persistent and widespread issue of non-compliance with electronic communication preservation requirements.

The CFTC, too, has taken significant steps to enforce compliance, imposing a $5.5m penalty on a global financial services firm for failing to record mobile device calls and preserve records as required by the Commodity Exchange Act and CFTC regulations. Ian McGinley, CFTC Director of Enforcement, highlighted the firm’s accountability for not meeting recording obligations and warned of increased penalties for non-compliance with CFTC orders.

Moreover, the Office of Gas and Electricity Markets (Ofgen) in Great Britain fined a firm £5.41m for failing to record and retain electronic communications related to energy trades. This marked a notable enforcement action under British regulatory requirements, showcasing the global reach of compliance expectations.

SEC Chair Gary Gensler has reiterated the foundational role of recordkeeping rules in maintaining market integrity, highlighting the adaptation of these rules to the digital age. Amendments to SEC Rule 17a-4 allow for electronic recordkeeping systems with complete audit trails, ensuring the preservation of communications in a tamper-proof format.

The emphasis on recordkeeping and off-channel communications compliance is not limited to the U.S. International regulations, including the FCA’s requirements in the UK, MiFID II in Europe, and IIROC in Canada, set similar standards for the preservation of electronic communications, underscoring the global consensus on the importance of regulatory compliance.

The message from regulators is unequivocal: firms must not only preserve communications across their organizations but also ensure easy access to these records for e-discovery and proof of compliance.

As communication technologies evolve, so does the complexity of compliance. From email to social media and ephemeral messaging platforms, firms face the challenge of monitoring a wide range of communication channels. The use of emojis and acronyms in these communications adds another layer of complexity, necessitating advanced surveillance systems to identify potential red flags.

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