Looking back, the Securities and Exchange Commission (SEC) had an extremely busy year. Over the year the SEC carried out 862 enforcement actions, obtained $4.3bn in disgorgement and penalties and was able to return $1.2bn to harmed investors.
Compared to other years, these numbers aren’t hugely significant. But by drilling a little deeper it’s clear that the SEC is particularly active around one area of its regulatory mandate and this shouldn’t be ignored by regulated firms in 2020.
A considerable 17% of all the SEC’s enforcement activities for 2019 (up from the previous year) were all about issuer reporting/accounting and auditing matters. As we already know, the SEC and FINRA have put in place considerable regulations around record keeping.
As part of the Securities Exchange Act 1934, rules 17a-3 and 17a-4 list all the kinds of information regulated firms have to keep records of and the way in which these records are stored (you can learn more about 17a-3 and 17a-4 in our summary here).
In 2019 a number of enforcement actions were to do with failings around record keeping. In April, marketplace lender Prosper was fined $3m for miscalculating and overstating annualized net returns for investors. Through these faulty records, investors were misled into making additional investments. A sizeable penalty but this would be dwarfed just a few months later.
In June, following an extensive enforcement campaign, Walmart was charged with having violated the Foreign Corrupt Practices Act (FCPA) after failing to sufficiently investigate certain anti-corruption risks regarding its international subsidiaries.
“Walmart valued international growth and cost-cutting over compliance - the company could have avoided many of these problems, but instead Walmart repeatedly failed to take red flags seriously and delayed the implementation of appropriate internal accounting controls.”
The retail giant agreed to pay around $282m to settle these bribery charges and consented to the SEC’s order that it had violated the records and internal accounting control provisions of the Securities Exchange Act 1934. At the time, Charles Cain – chief of the SEC Enforcement Division’s FCPA Unit – said:
Concerned about compliance with SEC 17a-3 and 17a-4? Grab our cheat sheet to make sure you understand everything about these crucial rules and how to meet them.
And while it didn’t involve a massive fine or settlement, 2019 also included the resolution on a long-running matter regarding Tesla CEO Elon Musk and his use of social media. A settlement with the SEC was reached that now requires all Musk’s communications about Tesla that is distributed via social media, Tesla’s website, press releases and investor calls to be preapproved by a securities lawyer.
This had all followed a tweet from Musk in 2018 declaring funding had been secured to take Tesla private for a predetermined share price.
This flaunted previously established rules over Musk’s social media and the SEC took him back to court, culminating in him stepping down as chair on the board of Tesla, paying a $20m fine and seeking approval to publishing all future communications that could be relevant to Tesla shareholders.
Compliance must remain a key focus
Falling foul of 17a-3 and 7a-4 is a serious matter, with fines upwards of $150,000 and potential bans and suspensions for individuals and companies alike. In 2017, FINRA fined BOK Financial Securities $175,000 for failures linked to these regulations and later that same year fined Raymond James & Associates $150m for failing to maintain reasonably designed supervisory systems and procedures for reviewing communications.
The following year, BGC Financial agreed to pay a $1.25m civil penalty over charges from the SEC it had failed to preserve proper records (the firm denied any wrongdoing via this settlement).
The message is clear – the broker/dealers will either have to invest in complying with 17a-3 and 17a-4 or spend the money on penalties instead.
Archiving can help
Each of these instances are very different but it’s clear the SEC is more active than ever in its enforcement of how record keeping rules are met. With the regulator introducing further changes to 17a-3 and 17a-4 this year (you can read more about them here), common sense dictates the SEC will continue to focus on this area for the immediate future.
Therefore, the need for reliable and best practice record keeping and archiving solutions has never been clearer. Leading financial services firms are using the MirrorWeb Archiving Platform to help solve these challenges. The platform enables you to capture, archive and monitor electronic communications to meet the compliance requirements of MiFID II, FCA, GDPR and FINRA.