The Securities and Exchange Commission (SEC) today announced charges against five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for widespread and long-term failures by the firms and their employees to maintain and maintain electronic communications.
The companies admitted to the facts set forth in their respective SEC orders, acknowledged that their conduct violated the recordkeeping provisions of the federal securities laws, agreed to pay combined civil penalties of more than $81 million, and began implementing improvements to policies and their compliance procedures. dealing with these violations.
- Northwestern Mutual Investment Services LLC (NMIS), along with Northwestern Mutual Investment Management Co. LLC (NMIM) and Mason Street Advisors LLC (Mason Street), agreed to pay a fine of $16.5 million.
- Guggenheim Securities LLC (Guggenheim Securities), along with Guggenheim Partners Investment Management LLC (GPIM), agreed to pay a fine of $15 million.
- Oppenheimer & Co. Inc. agreed to pay a $12 million fine.
- Cambridge Investment Research Inc. (CIR), along with Cambridge Investment Research Advisors Inc. (CIRA), agreed to pay a $10 million fine.
- Key Investment Services LLC (KIS), along with KeyBanc Capital Markets Inc. (KBCM), agreed to pay a $10 million fine.
- Lincoln Financial Advisors Corporation, along with Lincoln Financial Securities Corporation, agreed to pay a fine of $8.5 million.
- US Bancorp Investments Inc. (US Bancorp) agreed to pay an $8 million fine. and
- Huntington Investment Company (HIC), along with Huntington Securities Inc. (HSI) and self-reported Capstone Capital Markets LLC (Capstone) agreed to pay a fine of $1.25 million.
The SEC’s investigations revealed widespread and long-standing uses of unauthorized communication methods, known as out-of-channel communications, at all 16 companies. As detailed in the SEC’s orders, the broker-dealer firms admitted that, at least as far back as 2019 or 2020, their employees communicated via personal text messages about their employers’ business. The investment advisory firms admitted that their employees sent and received out-of-channel communications about recommendations made or proposed to be made and advice given or proposed to be given.
The companies did not retain or maintain the substantial majority of these communications outside the channel, in violation of federal securities laws. By failing to maintain and preserve the required records, some of the companies likely deprived the SEC of these out-of-channel communications in various SEC investigations. The failures involved employees at multiple levels of authority, including supervisors and senior executives.
Guggenheim Securities, CIR, Huntington, Key, Lincoln, NMIS, Oppenheimer and US Bancorp were each charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and failing to exercise reasonable supervision to prevent and the detection of these violations. CIRA, GPIM, HIC, KIS, Lincoln, NMIM and Mason Street were each charged with violating certain recordkeeping provisions of the Investment Advisers Act of 1940 and failing to exercise reasonable supervision to prevent and detect such violations.
In addition to significant financial penalties, each of the companies was ordered to cease and desist from future violations of the relevant recordkeeping provisions and was penalized. The companies also agreed to retain independent compliance counsel to, among other things, conduct comprehensive reviews of their policies and procedures regarding the retention of electronic communications located on personal devices and their respective frameworks for addressing their employees’ non-compliance with these policies and procedures.