Author: Marie-Noël Rochon

On September 27^th, the Securities and Exchange Commission (SEC) sanctioned various market participants, including certain of Wall Street’s most influential banks, for widespread violation of the recordkeeping obligations the latter are bound to under the Securities Exchange Act and other laws.

The SEC’s investigation revealed that between January 2018 and September 2021, employees of these market participants – at all hierarchical levels -- had communicated on business-related matters through private communication channels, including WhatsApp, instead of using their official email addresses. Most of these communications were subjected to no recordkeeping and books-and-records procedures, in stark contrast to official emails and other communications which must systematically be preserved.

In a press release, the SEC underlines that market participants under its jurisdiction have the obligation to keep records of all business-related matters. It also restates that trust is central to the proper functioning of financial markets and that the abidance with applicable book-and-records obligations is essential for regulators to reconstruct events when allegations of misconduct or wrongdoing are made. By failing to duly record all business-related communications conducted through private channels, the firms likely deprived the authorities of precious information of potential use to their investigations.

The SEC concluded that the firms had failed to comply with their recordkeeping obligations, as well as failed to supervise their employees to ensure compliance with these obligations. The SEC imposed sanctions against 16 market participants, ranging from $125 million to $10 million, and reached settlements nearing $200 million dollars with a number of others, for a global sum of approximately 2 billion dollars. In addition, the firms had to agree to comply with their obligations in the future and will be required to retain consultants to review their internal policies and procedures regarding recordkeeping practices for all means of communications, as well as review their enforcement procedures.

By levying the heaviest sanctions ever imposed in relation to such obligations, the SEC’s disclosed intention is to remind market participants of the importance of adapting their recordkeeping practices to new technologies and evolving practices. Gary Gensler, Chair of the SEC, summarized the matter as follows: “As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.”

These events should serve as a reminder to Canadian market participants regarding the importance of prevention in all matters pertaining to regulatory compliance. Indeed, Canadian firms are subject to similar recordkeeping requirements under applicable laws. In the specific context of the increased use of private means of communications post-pandemic, market participants should undertake proactive actions aimed at ensuring compliance with their obligations.