Yesterday, the Securities and Exchange Commission (“SEC”) charged HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc. for widespread failures to maintain and preserve electronic communications in violation of the federal securities laws. Both firms have agreed to pay penalties of $15 million and $7.5 million respectively, as well as other measures such as hiring compliance consultants, in order to settle the charges brought against them. In addition to the penalties, each firm was ordered to cease and desist from committing violations of the relevant recordkeeping provisions and was censured.

The SEC’s investigation of both firms identified pervasive and longstanding use of off-channel communications. The firms admitted that employees often communicated “off-channel” about securities business matters on their personal devices, using messaging platforms, such as WhatsApp. The failures involved employees at multiple levels of authority, including supervisors and senior executives, demonstrating a disregard for recordkeeping requirements. Both firms cooperated with the SEC’s investigation by self-reporting the recordkeeping failures after gathering communications from the personal devices.

Last year, the SEC set off fire alarms when the regulator charged 15 broker dealers and an investment adviser with related violations.

Recordkeeping provisions of the Securities Exchange Act of 1934 and the ability to preserve electronic communications will continue to serve as a focal point for the SEC. It is safe to assume that simply having policies and procedures and prohibiting the use of personal devices and text messaging applications are not enough. Advisers must implement solutions to ensure compliance with recordkeeping requirements and federal securities laws.

SEC3 can assist investment advisers with identifying effective solutions in archiving electronic communications and preventing any violations of recordkeeping provisions. SEC3 can not only provide recommendations but can also assist with the implementation and ongoing administration of compliance solutions.

In addition, SEC3 leverages over 100 years of combined regulatory compliance experience to deliver compliance knowledge and insight that you can trust. SEC3 strives to develop effective partnerships, where our clients feel we are an extension of your firm rather than another service provider. We pride ourselves on our quality and service that is unmatched rather than adopting the typical client-consultant relationship.

For more information, please contact us at info@seccc.com, at (212) 706-4029 x 229 or visit us on our website at www.seccc.com.