Importance of Abiding by SEC Rule 17a-4: Consequences of Non-Compliance

Dmitriy Smirnov

August 15, 2024

Securities Law

Recent enforcement actions by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) highlight the critical importance of adhering to the rules requiring firms to maintain and preserve required records of communications with clients.

SEC Rule 17a-4 under the Securities Exchange Act of 1934 mandates that broker-dealers maintain and preserve records of communications, including electronic communications, that pertain to their business. These records must be retained in a non-rewritable and non-erasable format for specific periods, typically three years, with the first two years being easily accessible. The rule is designed to ensure transparency, accountability, and regulatory compliance within the financial industry, thereby protecting investors and maintaining the integrity of the securities markets.

In a significant regulatory crackdown, the SEC and CFTC announced settlements totaling nearly $474 million with several broker-dealers, investment advisers, and other registered firms over failures to comply with federal record-keeping laws. The SEC reached settlements with 26 firms, resulting in a combined $392.75 million in civil penalties. Among the firms penalized were prominent names such as Ameriprise Financial Services, BNY (together with Pershing LLC), TD Securities, and Piper Sandler, among others. These firms admitted to violating record-keeping requirements, which deprived the SEC of critical communications needed for investigations.

The CFTC also announced settlements with three firms, totaling $81 million in penalties, for similar violations. The CFTC enforces similar record-keeping requirements under CFTC Rule 1.31, which mandates that firms maintain and preserve records of all communications, including electronic communications, related to their business activities.

These enforcement actions highlight the importance of adhering to record-keeping rules and the essential role that compliance plays in maintaining market integrity and protecting investors. The firms, including TD Bank, Cowen, and Truist, failed to stop employees from using unapproved communication methods, such as personal text messages, to conduct business.

The cases also demonstrate that failing to adhere to record-keeping requirements can lead to substantial financial penalties, reputational damage, and increased regulatory oversight. For firms, the lesson is clear: rigorous compliance with record-keeping obligations is not optional but a fundamental responsibility to avoid severe consequences. But there is one other lesson: self-reporting mitigates the consequences of a violation.

The CFTC’s orders required TD Bank to pay a $75 million civil monetary penalty and Cowen and Truist to each pay a $3 million civil monetary penalty. The three firms admitted the CFTC’s claims and were ordered to cease and desist from further violations of record-keeping and supervision requirements and engage in specified remedial undertakings. Truist, however, self-reported its violations and proactively reviewed the use of unapproved communication methods by its employees. In so doing, said the CFTC, “Truist set itself apart” from the other registrants the CFTC brought actions against, which resulted in a substantially reduced penalty.

This, of course, means that Truist was self-aware, either because it met its supervisory requirements or because it  heeded a warning by an internal whistleblower. Firms operating under the watchful eye of a regulator would be wise to seek legal counsel such as Fridman Fels & Soto to review its policies and procedures and, if necessary, conduct an internal investigation of any known violations to avoid more significant consequences of violations of these and other regulatory rules.

About Alejandro Soto

Alejandro O. Soto is a former federal prosecutor and senior SEC official, and a co-founder of the firm. He has substantial experience in complex civil disputes and white-collar criminal, securities compliance, and regulatory matters. An accomplished trial lawyer, Mr. Soto has personally tried over thirty federal, state, and arbitral cases and teaches trial advocacy at the University of Miami School of Law.