In the aftermath of the SEC’s landmark enforcement that hit just over two dozen firms over recordkeeping shortfalls, a compliance advisory firm says one particular case stands out as a potential warning sign for investment advisors at large.
In a note published August 15, Iron Road Partners cited the SEC’s August 14 action, which centered on the failure of 26 firms, including LPL, Raymond James, Ameriprise, and Osaic, to maintain and preserve electronic communications.
As a result of the crackdown, the firms have agreed to pay a collective $393 million in penalties, building on the SEC’s $81 million penalty haul in February against 16 firms that committed similar violations.
In its post-enforcement analysis, Iron Road Partners, which was started by the former co-head of the SEC’s private funds unit, Igor Rozenblit, highlighted that one firm involved in the SEC’s enforcement was an investment adviser without broker-dealer registration.
This marks a significant shift, the regulatory consultancy said, as it’s the first time the SEC has brought an enforcement action based on off-channel communications discovered during a routine examination.
“This case, therefore, could open the door to similar [exam] referrals and could embolden examiners [from the SEC] to focus on off-channel communication issues on examinations,” the note read.
Notably, the investment advisor wasn’t charged with violating the Compliance Rule, as it had relevant policies and procedures in place against off-channel communications.
“Employees were advised that the use of unapproved electronic communications methods was not permitted and acknowledged in writing that they read, understood, and abided by the adviser’s policies,” Iron Road Partners noted.
But an SEC exam revealed numerous individuals at the firm flouted those policies, engaging in off-channel communication exchanges with clients, counterparties, and other financial industry participants.
“[W]hile policies and procedures were in place, the adviser did not have sufficient surveillance to ensure policy compliance,” the note read. “Given that off-channel technology solutions still have not matured, ‘lack of surveillance’ could be an issue many advisers face.”
While the investment advisor cooperated with SEC’s investigation by imaging employees’ phones, it was still charged with failure to supervise and violations of the Investment Advisers Act Books and Records Rule. In one case, an employee at the firm discussed an investment strategy with a client on an unapproved device, violating a requirement to retain communications that are sent or received.
“This reinforces most advisers’ approach to broadly prohibit off-channel communications for business purposes,” the note said.
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