SEC Announces Settled Enforcement Action Over Failure To Preserve Documents
On July 17, 2018, the Securities and Exchange Commission (“SEC”) announced a settlement with a New York-based broker-dealer over allegations that the broker-dealer failed to preserve records requested by the SEC and inaccurately reported certain expenses. The SEC’s order instituting proceedings alleged that the broker-dealer failed to preserve records requested by the SEC staff by deleting certain audio files, and failed to maintain accurate books and records regarding certain expenses, in willful violation of Section 17(a)(1) of the Securities Exchange Act, and Rules 17a-3 and 17a-4 thereunder. The broker-dealer agreed to pay a $1.25 million civil penalty to settle the SEC’s claims without admitting or denying wrongdoing. See In the Matter of BGC Financial, L.P., Admin Proc. No. 3-18598 (July 17, 2018).
According to the SEC’s order, in March 2014, SEC staff issued requests to the broker-dealer (the “SEC Requests”) seeking, among other things, recorded telephone conversations of eight registered representatives. In 2013 (prior to receiving the SEC Requests), the broker-dealer had instituted a policy to retain digital recordings for a period of one year and to delete all digital audio files over a year old; however, the broker-dealer continued to retain certain older audio files that were subject to a litigation hold unrelated to the SEC Requests. The SEC claimed that things went awry in May 2014, two months after the broker-dealer received the SEC Requests, when the broker-dealer lifted the litigation hold and, pursuant to its policy, deleted audio recordings over one year old even though certain recordings were responsive to the newly received SEC Requests. According to the SEC, although the broker-dealer had issued a new litigation hold in response to the SEC Requests, it had not taken adequate steps to ensure that this notice was distributed to the technicians responsible for maintaining and deleting recordings. The SEC’s order stated that the broker-dealer discovered that the responsive recordings were deleted approximately two months after the fact, and had its external counsel disclose the deletion to the SEC.
Separately, the SEC’s order faulted the broker-dealer for failing to maintain accurate books and records concerning compensation, travel, entertainment and other expenses, including $600,000 in sports season tickets and $100,000 in expense reimbursements for one of its high-performing brokers.1 Section 17(a)(1) of the Securities Exchange Act and rules thereunder require every registered broker-dealer to maintain current accurate books and records, including ledgers reflecting, among other things, all expenses.
This settlement serves as a practical reminder of the importance of maintaining appropriate holds on documents subject to government requests. Any such hold should be sent to all relevant stakeholders, including the technicians tasked with preserving documents, and there must be adequate systems in place to track compliance with all relevant hold notices. Indeed, the settlement serves as a particular reminder that, when lifting a hold over certain documents, companies must understand the extent to which those documents may be implicated by other requests and hold notices. There is no suggestion in the SEC’s order that the broker-dealer acted in anything other than good faith, and the fact that the broker-dealer reportedly self-disclosed the lapse to the SEC staff is further evidence of that fact. However, good faith attempted compliance with preservation requirements is insufficient to avoid potential liability.
1 It is unclear whether these alleged violations arose from the same investigation as the SEC Requests.