SEC Crackdown on Record-Keeping Failures Offers a Warning to Canadian Securities Firms

A series of recent settlements in the United States relating to record-keeping violations, with fines totalling over US$1-billion, offer a reminder to Canadian securities firms of the importance of supervising the forms of communication used by their personnel.

The United States Securities and Exchange Commission (SEC) recently announced settlements with several securities firms, relating to failure by the firms to preserve records of messages sent from personal devices. The respondent firms agreed to fines of between US$10 and $125-million each, and the total fines levied by the SEC exceeded US$1-billion. The SEC charges related to securities industry professionals, including investment bankers and debt and equity traders, engaging in business communications through private text message and instant messaging platforms that were not approved or captured by the firms. This contravened the firms’ record-keeping obligations under applicable U.S. securities legislation. Notably, the settlements were not driven by any broader wrongful purpose to the communications, such as market misconduct or client harm; the unauthorized communications alone were taken as sufficient basis for the settlements and large fines that accompanied them, absent any other wrongdoing.

Canadian securities market participants should take note of the U.S. settlements. While Canadian authorities have not, to date, brought large-scale enforcement proceedings solely regarding unapproved communications channels, recent amendments to Canadian securities laws make it clear that market participants in Canada are subject to similar recordkeeping obligations as those invoked by the SEC. They are therefore potentially exposed to similar regulatory liability. For example, amendments to section 19 of Ontario’s Securities Act (OSA) have expanded the list of who must keep records, and require production of records that prove general compliance. Alberta and British Columbia’s securities acts, and National Instrument 31-103 (which applies across Canada), also impose expansive recordkeeping requirements on registrants. A firm that does not adhere to these record-keeping requirements will be exposed to large monetary penalties, ranging up to C$1-million per contravention in most provinces and territories.

It is likely that digital record-keeping will continue to be a focus of regulators on both sides of the border, particularly regarding the establishment and supervision of approved methods of communication by regulated firms. Canadian market participants should be mindful of the prospect of enforcement proceedings based solely on record-keeping contraventions, whether or not linked to other alleged misconduct. As the SEC settlements make clear, ensuring proper recordkeeping – including that all forms of business-related communication are captured and accessible by firm systems – is a regulatory compliance necessity in its own right, and not simply a prerequisite to preventing other forms of misconduct.

For more information, please contact:

Doug McLeod               +1-416-863-2705
Daniel Szirmak             +1-416-863-2548

or any member of our Securities Litigation group.