Early in April, the investment adviser population was hit with another “off-channel” enforcement action from the SEC with its $6.5 million fine against Senvest Management, LLC (“Senvest”), a contrarian, value-based fund manager in New York. The headlines from this case mainly focused on the SEC’s continued focus on compliance with recordkeeping requirements, with this particular case drawing heightened interest around the size of the fine and in the fact that the investigation was concentrated on a relatively small private fund investment adviser (as opposed to recent off-channel enforcement actions that mainly focused on dually-registered broker-dealers and advisers or affiliates).

A major theme of the recordkeeping violations revolved around Senvest’s policies and procedures requiring that business communications be retained on approved platforms and strictly prohibiting off-channel business communications. Senvest employees, including senior leadership, did not comply with firm policies and sent thousands of business communications through unapproved message platforms with auto-delete functionality. These actions allowed the SEC to charge Senvest with the failure to adopt and implement written policies and procedures “reasonably” designed to prevent violations of the Investment Advisers Act of 1940.  The overall impact of these recordkeeping issues has led most firms to reconsider their current electronic communication policies and increase their monitoring around identifying and preventing such violations.

Yet, beyond the glaring recordkeeping issues identified in this investigation, firms should take a step back to also understand certain of the violations in the cease-and-desist order. An easily overlooked violation that was away from the headlines centered around Senvest’s failure to reasonably supervise and prevent and detect certain violations. Specifically, the SEC uncovered that Senvest supervisory personnel failed to complete the required reviews of employees’ quarterly transaction and holdings reports which resulted in the failure to detect certain personal trading pre-clearance violations. Although many compliance officers may feel comfortable that they have reviewed their employees’ personal trading to uncover such violations, they may be coming up short in one key area: documenting it.

During an exam, the SEC may not only ask for personal trading records like annual holding and quarterly transaction reports but may also ask for documentation evidencing supervisory review. Unfortunately, many compliance officers fail to understand that “doing the review” is different than “documenting the review,” as telling a regulator that such reports were reviewed is simply not enough.  In addition, many smaller firms, such as those with a “dual-hatted” CCO, may also deal with the issue of having limited supervisory personnel to review the CCO’s personal trading. In an April 2022 Risk Alert, Investment Adviser MNPI Compliance Issues1, the SEC noted that “advisers did not have policies and procedures in place to assign the CCO’s reporting to another member….effectively permitting the CCO to self-review his/her own holding and  transaction reports.”

Overall, firms should assess their current compliance testing practices around electronic communications and personal trading to ensure that they can properly document these reviews through the development of compliance logs, memos, or other records that can substantiate a focus on prevention of recordkeeping violations as well document the supervisory process around both areas. Additionally, CCOs should ensure that they have the necessary internal or external support to review their own electronic communications and personal trading reports.

Salus GRC assists many of our clients in conducting and documenting both electronic communication and personal trading reviews. Electronic communication reviews include innovative and customized testing strategies to detect non-compliance with off-channel communication practices (including reviewing communications employees have engaged in via apps on their personal devices such as text message reviews). Additionally, personal trading testing ensures the necessary documentation to substantiate supervisory review for ALL employees, removing any potential conflicts created in smaller firms where compliance personnel may be reviewing their own personal trading.