Registered Investment Adviser Record-Keeping Policies: Recent SEC Enforcement Activity

Registered investment advisers are subject to record-keeping requirements regarding certain written communications, and in the last several years, the U.S. Securities and Exchange Commission has increased enforcement efforts against “off-channel communications” (i.e., business-related communications on unapproved electronic devices and systems, such as texts) that it believes violate these requirements.1 In a recent matter, on April 3, 2024, the SEC issued an enforcement action against Senvest Management LLC for violations of these rules and of Senvest’s own policies and procedures in relation to off-channel communications.

This recent regulatory activity, and specifically the SEC’s recent order in Senvest, highlights an important regulatory risk for registered investment advisers regarding record-keeping policies and the administrative requirements on which those policies are based.

Senvest Order Summary

Senvest is a Delaware limited liability company headquartered in New York. According to the SEC, from January 2019 through December 2021, Senvest employees at multiple levels of authority used personal texting platforms and other unapproved electronic communication services to internally and externally communicate about Senvest-related business matters in violation of both the Investment Advisers Act of 1940 and the firm’s policies.

Under Senvest’s policies prior to the settlement, the firm was required to retain all electronic communications that it sent or received. Moreover, Senvest employees were prohibited from using non-Senvest electronic communication services for business purposes unless there was an emergency or a technological disruption. In such instances, the employees were required to copy the communications to their business email accounts for proper archiving. Senvest’s policies also permitted the firm to access its employees’ personal devices to inspect for off-channel communications.

According to the SEC, Senvest failed (i) to implement adequate procedures to monitor whether its employees were following the firm’s policies about work-related communications and (ii) to access its employees’ personal devices to ensure that they were complying with its communications policies. For example, the SEC pointed to the communications of several senior Senvest officers and a managing director who used their personal devices to send and receive text messages concerning securities transactions. As a result of Senvest’s failures to enforce its policies, thousands of business-related, off-channel communications were not collected or retained. Of these, “[n]umerous messages related to matters within the scope of Advisers Act Rule 204-2(a)(7) and thus were required to be preserved by Senvest.”

The SEC charged Senvest with violating three provisions of the Advisers Act: (i) Section 204 of the Advisers Act and Rule 204-2(a)(7) thereunder, which require registered investment advisers to preserve originals of certain electronic communications that fall within enumerated categories; (ii) Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require registered investment advisers to adopt and implement policies reasonably designed to prevent violations of the Advisers Act; and (iii) Section 203(e)(6) of the Advisers Act, which provides for potential disciplinary action against registered investment advisers who aid and abet violations of the Advisers Act.2

To settle the matter, Senvest agreed to pay the SEC a penalty of $6.5 million and to comply with certain undertakings, including retaining a compliance consultant to conduct a comprehensive compliance review of Senvest’s remediated communications policies.

Requirements of Rule 204-2(a)(7)

The record-keeping requirements of Rule 204-2(a)(7) under the Advisers Act are narrower than Senvest’s internal policy of retaining all electronic communications sent or received by the firm. As previously mentioned, Rule 204-2(a)(7) requires a registered investment adviser to maintain records of specific categories of written communications that the adviser sends or receives. The Rule encompasses communications that are related to (i) recommendations made or proposed to be made and any advice given or proposed to be given; (ii) receipt, disbursement or delivery of funds or securities; (iii) placing or executing any order to purchase or sell any security; and (iv) predecessor performance.

The language of Rule 204-2(a)(7) is unclear as to whether its record-keeping requirements apply to communications that are solely internal to the registered investment adviser and that do not involve the adviser’s clients or any other third parties. A straightforward reading would be that they are not. This reading is bolstered by the wording of similar requirements in other regulations, such as Rule 17a-4(b)(4) of the Securities Exchange Act of 1934, which requires brokers and dealers to maintain originals of all business-related communications received and copies of all such communications sent by a broker or dealer and specifically applies to “inter-office memoranda and communications.” By contrast, Rule 204-2(a)(7) contains no express indication that the SEC meant for the internal communications between employees of a registered investment adviser to be preserved.

Despite the language of Rule 204-2(a)(7) not clearly requiring the preservation of internal communications, the Senvest Order suggests strongly that the SEC regards such communications to be within the scope of the Advisers Act’s record-keeping provisions. Thus, if an internal written communication falls within the scope of one of the enumerated categories of Rule 204-2(a)(7), the registered investment adviser should properly archive it to avoid liability under the record-keeping rule.3 Even if a communication does not fall within one of these categories, the Senvest Order makes clear that noncompliance with an adviser’s policy (to the extent its requirements are broader than those of Rule 204-2(a)(7)) can lead to a finding of a violation of Rule 206(4)-7 under the Advisers Act, and potentially even to censure for aiding and abetting violations of the Advisers Act under Section 203(e)(6).

Firm Policies and Procedures after the Senvest Order

In light of the Senvest Order, investment advisers should be particularly cautious about the breadth of their record-keeping policies. While broad policies eliminate the need for employees to gauge whether a communication is related to one of the categories under Rule 204-2(a)(7),4 the SEC will consider noncompliance with such policies when deciding what charges to bring. As evidenced by the Senvest Order, noncompliance with firm policies could lead to a Rule 206(4)-7 violation even in the absence of a Rule 204-2(a)(7) violation. Thus, investment advisers should implement communications policies that are, as stated in Rule 206(4)-(7)(a), “reasonably designed to prevent violation” of the Advisers Act but that are not so strict as to create enforcement and compliance issues for the firm. Investment advisers should be careful to actually enforce any policies they adopt.

Furthermore, in his remarks given on the same day that the Senvest Order was issued, Sanjay Wadhwa, deputy director of the SEC’s enforcement division, stated that the SEC would “take into consideration a firm’s efforts to comply with its recordkeeping obligations and to prevent off-channel communications” when determining the amount of a monetary penalty. Thus, investment advisers should be diligent about enforcing their policies exactly as written to ensure that the opportunities for off-channel communications are minimal and that all communications subject to the policies are collected and preserved.

Additionally, in the Senvest Order, the SEC highlighted the fact that Senvest promptly revised its policies and procedures prior to the settlement and provided employees with firm-issued cell phones that “automatically upload communications into Senvest’s archiving system for retention.” The SEC’s attention to this remedial effort signals that it approves of this approach as a method of compliance with the record-keeping provisions of the Advisers Act. Thus, investment advisers should consider adopting a similar policy.5 Registered investment advisers with questions or concerns about their communications policies or other compliance-related matters should contact an attorney in our Fund Formation and Investment Management Group for assistance.

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1 In a recent press release, the SEC reported charging 16 firms with record-keeping violations as part of its ongoing efforts to hold registered firms accountable for failures to maintain and preserve required electronic communications.
2 Besides Senvest’s record-keeping failures, the SEC also charged Senvest with violating Section 204A of the Advisers Act and Rule 204A-1 thereunder for failing to implement the requirements of the firm’s code of ethics.
3 See Robert E. Plaze, Regulation of Investment Advisers by the U.S. Securities and Exchange Commission (2017), where Plaze states that the record-keeping requirement for written communications is “broadly construed by the SEC staff to include communications to clients about advice as well as internal communications among personnel of the adviser about advice to be given to clients. As a result, the adviser must retain such communications.”
4 A letter from certain trade associations to Gary Gensler, the SEC’s chair, further argues that it is not good policy for the SEC to interpret instances of noncompliance with broad firm policies as violations of Rule 206(4)-7.
5 Importantly, in his remarks, Wadhwa also stated that the SEC will use precedent as a guide for determining what penalty to charge an investment adviser for a record-keeping violation.

 

Mia Thillet, a rising third-year law student at the University of North Carolina and summer associate at Robinson Bradshaw, contributed to this post.