New York-based hedge fund Senvest Management LLC will pay a $6.5 million penalty levied by the Securities and Exchange Commission last month for failure to maintain records of certain electronic communications.
After an investigation by the SEC, Senvest agreed to retain a compliance consulate to review its policies and procedures for off-channel communications, in addition to the fine. Senvest also agreed to implement improvements to its compliance policies and procedures.
The SEC investigation found that from January 2019 through December 2021, Senvest employees communicated about firm activities using personal texting platforms and other non-Senvest applications in violation of the firm’s policies and procedures. Senvest also failed to maintain or preserve the off-channel communications as required under federal securities laws.
“The Commission continues to focus on regulated entities’ compliance with record-keeping requirements. Adherence to these requirements is essential for the Commission to effectively exercise its regulatory oversight and enforce the federal securities laws,” said Eric Werner, Director of the SEC’s Fort Worth Regional Office, which conducted the investigation.
While the SEC’s investigation was confined to Senvest, other large funds, particularly RIAs, have taken note.
Robert Sutton, a partner in the private funds practice at Proskauer Rose, predicts similar investigations will follow.
“I wouldn’t be surprised if we see more of these in the coming months,” Sutton said.
Considering the SEC investigation of Senvest took several years, some believe active investigations of other firms are likely in progress.
“It’s a safe bet,” said David Tang, a partner at the law firm of Dorsey & Whitney, who represents funds managers.
Indeed, some alternative investment firms have confirmed in disclosures that they are the subject of investigations, specifically targeting their record-keeping practices.
Industry observers say the best way for firms to react is to be cooperative and transparent with the SEC if instances of illicit communications are discovered, as fines take into consideration how cooperative a firm is with regulators, according to Joshua Broaded, who leads ACA Group’s regulatory advisory practice.
One executive at Insight Partners who did not want to be named said that although he does not believe his firm has done anything wrong, internal efforts are being made to ensure that there hasn’t been any inadvertent wrongdoing.
“We’re doing a self-audit right now. As far as I know, nothing wrong has been found, but obviously, we don’t want any surprises,” the executive said. “I’m sure other firms are doing the same thing. No one ever wants to be cited by the SEC. It’s not good for business.”
Speaking on condition of anonymity, an investment professional at a middle market buyout firm noted that the SEC takes issue not only with text message communications but also with standard workplace chat platforms like Microsoft Teams and Slack—if the proper archival procedures aren’t in place.
Implementing such record-keeping can be surprisingly complex for general-purpose communications tools not built with the SEC in mind. At the same time, policing these channels can be challenging, especially for firms trying to break ingrained staff communications behaviors as they work to return to compliance.
Firms hoping to slip under the radar may unknowingly be taking on substantial risk. Text and chat communications can receive intense scrutiny from the SEC as part of its standard audit, according to professionals who have experienced the process.