SEC Reaffirms Importance of Self-Reporting and Cooperation, but Benefits Remain Ambiguous

Recently, a senior officer from the SEC's Division of Enforcement defended the penalties the Commission has levied on firms for failing to capture and retain their employees' "off-channel" electronic communications, and, in so doing, offered insight into factors the Commission has used in determining those penalties, the most important of which was self-reporting.

Since December 2021, the SEC's Division of Enforcement has conducted a "recordkeeping initiative" involving charges against broker-dealers, investment advisers, and credit ratings agencies for failing to capture and retain their employees' "off-channel" electronic communications through various smartphone applications. In total, the SEC has levied $1.7 billion in penalties against nearly 60 firms, which range in amounts from $2.5 million to $125 million.  

During an April 3, 2024, presentation by senior Enforcement Division officers, Deputy Director Sanjay Wadhwa defended the Commission's penalties in these cases, stressing that the Commission makes an "individual assessment" of each firm's conduct based on certain factors, the most important of which is whether the firm self-reported the violations. Mr. Wadhwa asserted that the Commission has tangibly credited firms for self-reporting, citing as an example the $2.5 million penalty (which is the smallest to date) imposed on a firm that had detected and self-reported violations to the SEC.  

Mr. Wadhwa identified other factors the Commission considers in assessing an appropriate penalty in these cases: 

  • The size of the firm in terms of revenues from its regulated businesses and the number of registered professionals;
  • The scope and breadth of the violations, including the number of off-channel communications and the number of implicated professionals; 
  • The firm's efforts to comply with its recordkeeping obligations and/or to prevent off-channel communications, including its "timely adoption of meaningful technological or other solutions";
  • The precedents set by prior settled orders issued in connection with the recordkeeping initiative; and 
  • The firm's cooperation with and assistance to the SEC staff during the investigation. 

Notwithstanding Mr. Wadhwa's remarks, how and to what extent the Commission actually credits self-reporting and cooperation remains a black box, as the agency has not yet followed DOJ's lead by providing clear and standard guidance for cooperation credit rather than sprinkling hints throughout various enforcement actions. Still, Mr. Wadhwa's comments provide a framework for companies facing SEC investigation to follow so that they can best position themselves for leniency.

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