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SEC Deputy Director Sheds Light on Commission’s Enforcement Approach for Two Key Initiatives

Overview of SEC Enforcement Initiatives at the “SEC Speaks” Event

At the annual “SEC Speaks” event, SEC Division of Enforcement Deputy Director Sanjay Wadhwa provided insight into the Commission’s approach to two enforcement initiatives – recordkeeping and marketing rule requirements.  These two initiatives have garnered a lot of attention recently because of the size and range of the associated penalties.

Detailed Look at the SEC’s Recordkeeping Initiative

The SEC’s recordkeeping initiative focuses on how broker-dealers, investment advisers, and security-based swap entities preserve electronic records.  The initiative prioritizes enforcement of the electronic recordkeeping requirements these entities must adhere to.  As part of the recordkeeping initiative, in 2022 the Commission issued new rules regarding requirements to preserve electronic records exclusively in a non-rewriteable, non-erasable format and, among other things, added an audit-trail alternative under which electronic records can be preserved in a manner that permits the re-creation of an original record.

The SEC’s marketing rule initiative focuses on enforcement of the marketing rule, as amended in 2020, which, among other things, prohibit registered advisers using testimonials and endorsements without appropriate disclosures and oversight.

The rule prohibits, for example, including hypothetical performance in advertisements unless the advertiser has  adopted and implemented safeguards reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the advertisement’s intended audience.

Recordkeeping Violations and Penalties

Both enforcement initiatives have resulted in the collection of very significant penalties.

Since December 2021, the Commission has charged nearly 60 firms with recordkeeping violations, resulting in penalties ranging from $2.5 million to $125 million, for a combined total of over $1.7 billion.  Wadhwa shared the following non-dispositive factors that the SEC uses in assessing penalties on an individualized basis:

  • Size of the firm, which involves a look at the firm’s revenues and number of registered professionals at the firm;
  • Scope of the violations, including but not limited to how many individuals communicated off-channel and the number of off-channel communications;
  • Efforts to comply with the firm’s recordkeeping obligations and to prevent off-channel communications;
  • Cooperation with SEC staff in their investigation;
  • Precedent from similarly situated past enforcement actions; and
  • Whether a firm self-reported (which he noted is the most significant factor in assessing penalties)

Marketing Rule Violations and Penalties

The initiative to enforce compliance with the amended marketing rule has involved penalties ranging from $175,000 to $50,000.  In his speech, Wadhwa outlined the following factors that the SEC uses in determining penalties involving marketing rule violations:

  • The firm’s reported regulatory assets under management;
  • The regulatory history of the firm, including the nature of any prior enforcement actions;
  • Whether the firm promptly remediated the noncompliant marketing materials;
  • The need to send strong messages of accountability and deterrence; and
  • Whether a firm self-reported and cooperated with the SEC’s investigation.

Guidance on Assessing Penalties for Violations

In highlighting the factors relevant to the SEC’s assessment of penalties for recordkeeping and amended marketing rule violations, Wadhwa delivered helpful guidance on what the SEC considers particularly important in evaluating violations and assessing penalties.  Those factors include the scope of the violation, as well as whether the firm took steps to address the problem.

Role of Whistleblowers in SEC Enforcement

Whistleblowers can be especially useful to the SEC in shedding light on those factors.  If the SEC investigates allegations and recoups sanctions in an enforcement action, the whistleblower may receive a percentage of the recovery as an award.  For a free, confidential review of your matter by experienced SEC whistleblower lawyers, contact Phillips & Cohen.

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