Two Firms That Avoided SEC Charges Offer Self-Reporting Lessons

Charges brought by the Securities and Exchange Commission against 13 firms are part of a long line of actions by the SEC and Commodity Futures Trading Commission targeting “off-channel” recordkeeping violations in the last three years, which have cumulatively totaled about $3.5 billion in fines.

The firms were accused in orders issued Sept. 23 and 24 of failing to capture, retain, and supervise electronic messaging content. Eleven of them were fined a combined $88 million for recordkeeping shortcoming. The remaining two—broker dealer Qatalyst Partners and investment adviser Atom Investors—avoided civil penalties because of self-reporting, cooperation, and prompt remediation of identified issues.

The vastly different outcome for Qatalyst and Atom shows that it’s difficult to collect a definitive set of compliance best practices for self-reporting—there’s no one-size-fits-all approach, despite a few common elements. But there is some practical guidance for compliance officers.

Enhanced training is one factor. The SEC didn’t offer details about the contents of Qatalyst and Atom’s trainings, but it presumably included granular guidance around off-channel communications. Qatalyst provided training reinforcements and required attestations from employees. The SEC noted that Atom retained outside counsel to provide training.

Another common throughline is the economic and productivity gain realized by the SEC as at least partially determinative in the credit assessment process.

The SEC noted that Atom “undertook efforts to retrieve, analyze, and organize trading data to match orders directed by the other entity to execution data” and this cooperation helped the SEC to “conserve resources.” In Qatalyst’s case, the SEC stated that the firm’s self-reporting and proactive identification of key documents and facts helped commission staff “in efficiently investigating the conduct.”

Cooperation activity that allows the SEC to more efficiently and effectively execute investigations appeared to be a significant factor when declining to impose civil penalties for these off-channel cases. The commission appears to consider the cooperation even when it’s not directly related to off-channel issues, as was the case with Atom’s assistance collating trading data.

The SEC noted Qatalyst’s deployment of new technology to address off-channel issues and highlighted Atom’s internal reviews to assess recordkeeping gaps, as well as changes to its compliance program.

It is difficult to discern a set of compliance activities that consistently serve to mitigate civil penalties in off-channel enforcement. While transparency and willingness to disclose issues are components, disclosure isn’t enough on its own.

Self-reporting isn’t guaranteed to result in a reduction or elimination of a civil penalty. Furthermore, the public disclosure of these orders, even without a civil penalty, might discourage some firms from reporting.

Compliance officers must painstakingly evaluate the status of a firm’s efforts regarding off-channel remediation prior to self-reporting. The extent of the firm’s remedial activities must be cataloged to determine the potential viability of cooperation credit. This includes conducting extensive investigations, objective assessments of the extent of the off-channel activities, deployment of technology to address off-channel issues, employee discipline at all levels of seniority, and related trainings.

Determining how the disclosure will meaningfully assist SEC staff and provide economic efficiency is essential. Compliance officers can demonstrate real value by rigorously analyzing proposals to self-report and scrutinizing the steps taken that might mitigate civil penalties.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Marc Gilman is general counsel and vice president of compliance at Theta Lake, and adjunct professor at Fordham University School of Law.

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