On April 3, 2024, the SEC levied a $6.5 million fine against Senvest Management, LLC, a contrarian, value-based investment firm based in New York, for “widespread and longstanding failures to maintain and preserve certain electronic communications” and failing to enforce its code of ethics.
Key Takeaway: Yet another “off-channel communication” enforcement action from the SEC. What’s most interesting, to me, are the violations in the “cease and desist” order. The SEC cited Senvest for (1) failure to keep records, (2) failure to adopt and implement written policies and procedures, (3) failure to adopt a Code of Ethics, and (4) failure to supervise. This seems harsh. From what I can tell, Senvest had policies and procedures and a code of ethics. The SEC summarizes them in the cease and desist order. Senvest’s issues stemmed from not following, enforcing and supervising those policies and procedures and code of ethics and the missing records resulting from employees’ non-compliance.
Recordkeeping Failures
Senvest’s policies and procedures contained all of typical elements designed to designed to ensure the retention of Senvest’s business-related communications, including electronic communications. Senvest’s policies and procedures required:
- Senvest to retain all electronic communications that it sends and receives;
- Use of only approved communication platforms for business-related communications;
- Senvest employees to acknowledge in writing that they read, understood, and abided by Senvest’s compliance manual, which provided that the use of unapproved electronic communication methods, including on their personal devices, was not permitted and that they should not use personal email, any form of text messaging, iMessage, or PIN-to-PIN messaging to transmit work-related messages; and
- all employees, including senior officers, to attend an nual training on Senvest’s compliance manual, which included Senvest’s code of ethics.
The SEC alleged between 2019 and 2021 Senvest’s employees sent and received thousands of business-related messages using off-channel communications. For example, three senior Senvest officers and a managing director used personal devices to send and receive thousands of text messages related to firm business, including communications concerning recommendations made or proposed to be made and advice given or proposed to be given about securities. That activity resulted in the SEC’s claim Senvest failed to enforce its policies and procedures.
Making matters worse, many of the Senvest employees using the unapproved communication platforms had set their devices to automatically delete messages after 30 days resulting in the failure to maintain proper books and records deficiency.
Trading Pre-Clearance Failures
The SEC uncovered numerous instances of trading by Senvest’s employees that violated Senvest’s policies and procedures requiring pre-clearance of all personal securities transactions. Additionally, the SEC noted supervisory personnel at Senvest failed to complete required reviews of employees’ quarterly transaction and holdings reports resulting in the failure to detect the aforementioned pre-clearance violations.
Remedial Efforts
In the order, the SEC noted Senvest’s remedial efforts as a mitigating factor. These remedial efforts are instructive to other firms seeking answers on how to deal with employee “off-channel communications” and personal account trading. Senvest’s actions included:
- revising the firm’s policies and procedures;
- providing employees with firm-issued devices that automatically upload communications into Senvest’s archiving system for retention;
- prohibiting option trading in employee accounts and setting enhanced scrutiny triggers; and
- prohibiting employees from trading in positions owned by the firm’s clients.
Senvest’s most interesting action, to me, is the second bullet (issuing firm devices) because most small, private equity firms operate under a “bring your own device” policy. However, as the SEC continues to hammer firms for recordkeeping violations related “off-channel communication,” mostly related to text and app-based messaging, how long until firm-issued devices become the norm?
How Trillium Can Help
Testing and Surveillance: A key component of Trillium’s ongoing compliance support is reviewing your firm’s practices in key risk areas against policies and procedures and disclosures. The ability to identify and rectify problematic areas, prior to an examination, is integral in preventing potentially significant time and expense later on.
Compliance Program Development: Trillium helps you put in place policies and procedures that work for your firm. Developing and applying consistent policies and procedures is paramount to fulfilling a firm’s regulatory obligations and fiduciary duty.