Broker-Dealer Settles Record Keeping Charges for $1.25 Million

Broker-Dealer Compliance + Regulation
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On July 17, 2018, the SEC announced that it had entered into a settlement with a broker-dealer charged with failure to preserve certain records and inaccurately recording travel, entertainment, and other expenses. The broker-dealer agreed to pay a $1.25 million penalty to settle the charges.

The SEC found that after receiving document requests from the SEC’s Division of Enforcement, the broker-dealer deleted audio files for certain recorded telephone lines that were responsive to the document requests. According to the SEC, the files were deleted in accordance with the firm’s records policy after an unrelated litigation hold was lifted. Although the broker-dealer had issued a separate litigation hold notice after receiving the SEC staff’s document request, it did not ensure that this litigation hold notice was distributed to the technicians in the department responsible for maintaining voice recordings.

The SEC also found that the broker-dealer failed to maintain books and records that accurately recorded compensation, travel, entertainment, and gifts. For example, the SEC found that the broker-dealer provided a high-performing broker with season tickets worth more than $600,000 per year and did not record the cost of the tickets as compensation in its general ledger. The SEC also found that the broker-dealer reimbursed certain brokers for expenses associated with travel and other personal expenses without a sufficiently documented business purpose, and that the broker-dealer recorded certain gifts to customers as entertainment rather than gifts.

According to the SEC staff, the “failure to preserve and produce responsive documents undermines the Commission’s ability to provide effective oversight of registrants and to carry out its mission to protect investors.” The broker-dealer settled the charges without admitting or denying the SEC’s findings.

Our Take

Broker-dealers and other registrants need to ensure that their policies and procedures include policies designed to ensure compliance with applicable record keeping obligations. Although record keeping violations will often appear as secondary deficiencies or violations, they are grounds for separate SEC enforcement action, as this broker-dealer found out the hard way.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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