SEC’s landmark recordkeeping action could ‘embolden examiners’

SEC’s landmark recordkeeping action could ‘embolden examiners’
The regulator’s scrutiny and charges against one firm could spark tighter enforcement over off-channel communications, says compliance consultancy.
AUG 15, 2024

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.

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.