SEC Targets Standalone Investment Adviser in Groundbreaking Off-Channel Communication Enforcement Action
On April 3, 2024, the U.S. Securities and Exchange Commission (SEC) announced a landmark enforcement action against Senvest Management, LLC (Senvest), marking the first such action against a private fund adviser and a standalone investment adviser for failures related to off-channel communication recordkeeping. This case represents a significant development in the SEC’s ongoing enforcement efforts focused on recordkeeping failures in the financial industry.
Background
Since initiating investigative sweeps in 2022, the SEC has aggressively pursued enforcement actions against broker-dealers and dually registered firms concerning off-channel communications. However, standalone investment advisers have faced fewer actions, partly due to ongoing debates over the scope of recordkeeping requirements under the Investment Advisers Act of 1940 (Advisers Act). The Advisers Act Recordkeeping Rule, codified in Rule 204-2(a)(7), mandates the retention of specific types of communications but has been less clear on broader interpretations applicable to off-channel communications.
The SEC’s Enforcement Action
The SEC’s settled order against Senvest highlights several key issues:
Off-Channel Communications: From January 2019 to December 2021, Senvest employees used personal texting platforms and other non-firm electronic communication services to discuss firm-related business. This practice violated both the Advisers Act Recordkeeping Rule and Senvest’s own policies, which prohibited non-retained electronic communications except during emergencies. The firm failed to enforce its policies effectively, including not accessing employees’ personal devices to verify compliance.
Code of Ethics Violations: The SEC found that Senvest did not enforce its written code of ethics, which required pre-clearance for personal securities transactions and timely personal-trading reviews. The firm’s supervisory lapses led to additional charges under Section 204A of the Advisers Act and Rule 204A-1.
Failure to Supervise: The SEC charged Senvest with failing to supervise its employees adequately regarding the aforementioned recordkeeping and ethical compliance failures, in violation of Section 203(e)(6) of the Advisers Act.
To resolve these issues, Senvest agreed to a $6.5 million penalty and undertook several remedial actions, including retaining a compliance consultant. The SEC acknowledged Senvest’s cooperation and the corrective measures implemented.
Implications for the Industry
This enforcement action underscores several critical points for standalone investment advisers:
Recordkeeping Obligations: While the SEC has previously applied broader recordkeeping standards to dually registered firms, this case confirms that internal communications are subject to the Advisers Act Recordkeeping Rule. This highlights the need for advisers to carefully manage and archive all business-related communications, regardless of the platform used.
Enforcement Trends: The SEC’s decision indicates a potential increase in enforcement actions against standalone investment advisers. Firms should anticipate closer scrutiny and be proactive in aligning their recordkeeping practices with regulatory expectations.
Penalty Calculations: The SEC’s approach to calculating penalties remains somewhat opaque. Recent guidance from the SEC’s Division of Enforcement emphasizes factors such as firm size, scope of violations, compliance efforts, and cooperation. Firms should be prepared for substantial penalties and ensure robust compliance programs to mitigate risks.
Policy Implementation: The SEC’s critique of Senvest’s policy enforcement illustrates the importance of implementing and enforcing comprehensive communication policies. Firms must ensure that their policies are not only well-drafted but also effectively monitored and enforced.
Conclusion
The SEC’s action against Senvest serves as a pivotal case in the evolving landscape of financial regulation, particularly concerning off-channel communications and recordkeeping. Standalone investment advisers must now navigate a more stringent regulatory environment, ensuring that their recordkeeping practices and internal controls meet the expectations set forth by the SEC. Firms should review their policies, enhance their compliance frameworks, and stay informed about regulatory developments to avoid similar pitfalls.
References
¹ U.S. Securities and Exchange Commission, Senvest Management, LLC Settlement Order (April 3, 2024), available at SEC.gov.
² For further discussion of the Advisers Act Recordkeeping Rule, see the January 31, 2023, letter from trade associations to the SEC available at SEC.gov.
³ Sanjay Wadhwa, Deputy Director, SEC Division of Enforcement, Remarks at SEC Speaks 2024 (April 3, 2024), available at SEC.gov.
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