Recordkeeping enforcement reaches brokers, advisors and credit rating agencies

The wave of recordkeeping enforcement actions in the finance sector has now expanded to brokers, investment advisers, and credit rating agencies. Leading this charge are the U.S. Securities and Exchange Commission (SEC) and the Commodity Trading Futures Commission (CFTC).

The scrutiny focuses on firms’ negligence in halting senior staff from employing unapproved channels for communication, notably personal texts and WhatsApp. The running total of penalties due to these breaches currently stands at a staggering $2.6bn.

Communication monitoring RegTech platform Theta Lake recently explored the rising enforcement action brokers, advisors adn credit rating agencies face for recordkeeping.

The CFTC’s enforcement efforts have resulted in a $20m fine on an introducing broker and a futures commission merchant of the same group. Their primary fault? Not adhering to CFTC’s recordkeeping norms since 2019. This lapse involved a breach of the firm’s internal code of conduct, with the said violation extending even to supervisors who overlooked the firm’s communication procedures.

Meanwhile, the SEC’s actions targeted a broader range. Five broker-dealers, three dually registered broker-dealers and investment advisers, two linked investment advisers, and, separately, two credit rating agencies all faced penalties for failing to preserve electronic communications. The total cost for these ten firms amounted to $79m, with an additional $10m for recordkeeping failures at the credit rating agencies. An underlying trend across these breaches was off-channel, personal text-based communication. Such practices, which sidestep federal securities laws, seem to be widespread among employees, including senior-level staff, a trend not lost on both the SEC and CFTC.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, spotlighted one firm that saw a reduced penalty thanks to its initiative in self-reporting the problem. He stated, “There are real benefits to self-reporting, remediating and cooperating.”

Regulators are making their stance crystal clear: zero tolerance towards slackness in communication capture. Most firms have consistently failed to meet their electronic communication recordkeeping obligations. More worrying, however, is the apparent inability of these firms to learn from past mistakes. Regulatory statements strongly imply that, especially for top-tier management, compliance isn’t a choice but a mandate.

It’s evident that the issue of unmonitored communication channels persists. Firms must introspect and expand the features of approved platforms. By doing so, they can enhance productivity, increase employee morale, and reduce the use of off-channel platforms. The ultimate goal should be to comprehensively capture all forms of communication. Firms that remain inactive risk even steeper sanctions, possibly extending to senior personnel’s direct accountability.

Theta Lake, an innovative player in this space, is supported by investment giants like Cisco, RingCentral, Salesforce, and Zoom. The firm offers a renowned product suite that ensures compliance and security across modern collaboration platforms. Partnering with leading platforms like Microsoft 365, Slack, and Zoom, Theta Lake aids businesses in safely expanding their unified communication networks, capturing all elements of a conversation, ensuring a full audit trail for oversight and regulatory purposes.

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