June 27, 2022

Volume XII, Number 178

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June 27, 2022

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SEC Investigations Relating to Record Preservation Practices Likely to Continue

The U.S. Securities and Exchange Commission (SEC) has continued to increase its focus on identifying and investigating violations of record preservation requirements are instrumental to its mission of protecting investors. Gary Gensler, Chair of the SEC, recently noted that “[b]ooks-and-records obligations help the SEC conduct its important examinations and enforcement work. They build trust in our system.”(1)

With the ongoing evolution of mobile technology and the ability to communicate instantaneously across various platforms, the SEC appears to be closely scrutinizing registrants’ record preservation practices to ensure that firms are in compliance with the relevant federal securities laws.(2) Pursuant to Section 17(a)(1) of the Exchange Act, Rule 17a-4 requires broker-dealers to preserve all communications received and copies of all communications sent relating to its business for at least three years.(3) Based on recent enforcement activity by the SEC, the SEC appears inclined to pursue actions against firms for failing to properly monitor and retain employees’ business communications. For example, late last year, J.P. Morgan Securities LLC (JPMS), agreed to pay the SEC a $125 million penalty for “widespread and longstanding” failures to preserve business communications.(4) This settlement was noteworthy in that the SEC required an admission by JPMS to the facts set forth in the SEC’s order.(5)

The SEC’s order described how JPMS policies and procedures prohibited employees from using personal e-mails, chats or text applications for business purposes.(6) Further, JPMS specifically identified WhatsApp as a prohibited communication method for any correspondences relating to the business.(7) Notwithstanding these policies, the SEC found that JPMS failed to monitor employee compliance with the relevant policies and federal securities laws.(8) The SEC found that from at least January 2018 through at least November 2020, JPMS “employees often communicated about securities business matters on their personal devices, using text messaging applications (including WhatsApp) and personal email accounts.”(9) The SEC noted that due to JPMS’s failure to adhere to the federal securities laws and its own recordkeeping policies, numerous SEC investigations were delayed and/or compromised because JPMS was unable to account for relevant communications.(10) As part of the settlement, JPMS agreed to retain a compliance consultant to conduct a comprehensive review of its recordkeeping practices.(11)

Notably, the U.S. Commodity Futures Trading Commission also fined JPMS $75 million for the same misconduct.(12)

The SEC’s investigation of JPMS appears to highlight an ongoing enforcement priority concerning recordkeeping practices at financial firms. For example, Goldman Sachs disclosed in its Form 10-K that the SEC is investigating “the firm’s compliance with records preservation requirements relating to business communications sent over electronic messaging channels that have not be been approved by the firm.”(13) Goldman Sachs stated that it is currently cooperating with the SEC’s investigation.(14)

Key Takeaway: Review Record Preservation Policies and Adapt to Advancements in Mobile Technology

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, previously noted that “[r]ecordkeeping requirements are core to the Commission’s enforcement and examination programs and when firms fail to comply with them … they directly undermine our ability to protect investors and preserve market integrity.”(15)A strong record preservation system will help to address the expanding challenges presented by the continued development of mobile technology and messaging applications. Therefore, registrants would be well-served to evaluate their record preservation policies, as well as their current practices, to assess whether the policies are appropriately tailored to their businesses and whether they are being followed.


FOOTNOTES

(1) Press Release, U.S. Secs. & Exch. Comm’n, JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges (Dec. 17, 2021), https://www.sec.gov/news/press-release/2021-262.
(2) Id.
(3) J.P. Morgan Secs. LLC, Exchange Act Release No. 93807, ¶ 35 (Dec. 17, 2021).
(4) Supra note 39
(5) Id.
(6) J.P. Morgan Secs. LLC, Exch. Act Release No. 93807, ¶¶ 13-15 (Dec. 17, 2021).
(7) Id. ¶ 15.
(8) Id. ¶ 18.
(9) Id. ¶¶ 5, 19.
(10) Id. ¶¶ 32-34.
(11) Id. ¶ 39.
(12) Katanga Johnson, J.P. Morgan Securities to pay $200 million to settle U.S. regulatory charges on record-keeping lapses, Reuters (Dec. 17, 2021), https://www.reuters.com/business/jpmorgan-securities-pay-125-mln-settle-sec-charges-record-keeping-lapses-2021-12-17/.
(13) The Goldman Sachs Grp., Inc., Ann. Rep. (Form 10-K) (Feb. 24, 2022).
(14) Id.; see also Dean Seal, SEC Probing Goldman’s Biz Chats on Unapproved Channels, Law360 (Feb. 25, 2022), 
(15) Press Release, U.S. Secs. & Exch. Comm’n, JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges (Dec. 17, 2021), https://www.sec.gov/news/press-release/2021-262

© 2022 Vedder PriceNational Law Review, Volume XII, Number 126
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About this Author

Jason B. Sobelman Associate Vedder Price
Associate

Jason B. Sobelman is an Associate in Vedder Price’s Chicago office and a member of the firm’s Litigation group.

Mr. Sobelman received his law degree from Washington University School of Law and received his undergraduate degree, magna cum laude, from the University of Miami. During law school he served as Chief Primary Editor for the Washington University Journal of Law and Policy, and received an award for Excellence in Oral Advocacy. He also completed a legal internship and externship at the United States Attorney’s Office...

312-609-7585
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