On April 3, 2024, the Securities and Exchange Commission (“SEC”) expanded the scope of its ongoing initiative to enforce laws and regulations governing the recordkeeping conduct of registered entities.  Historically, these particular enforcement actions have focused primarily on broker-dealers and dually registered broker-dealers and investment advisers.  But for the first time, on April 3, the SEC brought an action against a standalone registered investment adviser, Senvest Management, LLC, imposing a $6.5 million penalty for failing to preserve “off-channel communications” in accordance with the Investment Advisers Act of 1940 (the “Advisers Act”).[1] 

Notably, the recordkeeping obligations for broker-dealers are more stringent than those for investment advisers.  For example, while Section 17(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the related Rule 17a-4(b)(4) require broker-dealers to preserve all communications “relating to its business as such,” the Advisers Act and the corresponding Rule 204-2(a)(7) dictate investment advisers’ preservation obligations based on specific categories of communications, including those relating to investment advice, securities transactions, fund performance, and certain required notices.

In its press release announcing its enforcement action against Senvest, the SEC specifically cited Senvest employees’ use of unapproved devices and communications platforms to discuss company business.[2] In one case, the relevant employees used personal devices with active thirty-day autodelete policies.[3]  The SEC also noted that Senvest supervisors, who were responsible for preventing the use of off-channel communications by junior employees, themselves were using off channel communications to discuss Senvest business.

In addition to the monetary penalty, the SEC censured Senvest and ordered it to cease and desist from further violations of the Advisers Act and relevant rules.[4] As has become common in the suite of remedies to redress these violations, Senvest has agreed to mitigate the risk of future non-compliance by hiring a compliance consultant to review its “policies and procedures relating to the retention of electronic communications found on personal devices and the framework for addressing non-compliance by its employees with those policies and procedures.”[5]

By expanding the scope of its recordkeeping enforcement initiative, the SEC has demonstrated that it perceives widespread compliance challenges with the relevant federal laws and regulations among registered investment advisers.[6] The SEC views this recordkeeping enforcement initiative as an effective deterrent against violations, and an incentive for advisers to redouble their compliance efforts to prevent violations in the first place.  Should violations occur, proactively cooperating with the SEC can mitigate any resulting penalties.

We will continue to monitor developments in the SEC’s enforcement of off-channel communications.