The headline of the SEC’s September 24, 2024 Press Release reads “Eleven Firms Pay More than $88 million Combined to Settle SEC’s Charges for Widespread Recordkeeping Failures.” While that usually tells you everything you need to know. The Press Release includes an interesting sub-headline: One additional firm will not pay a penalty because it self-reported, self-policed, and demonstrated efforts at compliance.
How did Qatalyst Partners avoid the significant monetary penalties that have become commonplace?
Background
Qatalyst Partners LP (“Qatalyst”) is a California-based, global, independent investment bank that has been registered with the SEC since 2008 as a broker-dealer.
According to the SEC’s Settlement Order, Qatalyst maintained policies and procedures to ensure business-related records, including electronic communications. Qatalyst advised personnel that the use of unapproved electronic communications methods was not permitted and should not be used for business purposes. Qatalyst’s electronic communications policy was included in annual, mandatory training. Qatalyst also advised personnel to not list personal phone numbers in email signatures.
Beginning in 2017, Qatalyst provided personnel with a compliant text-message process that could retain business communications and instructed personnel to use only this process to communicate about Qatalyst’s broker-dealer business. Qatalyst’s policies and procedures evolved to allow for the use of additional messaging applications, firm-issued devices configured to allow the separation of business and personal communications, separate phone use, and Slack and LinkedIn communications.
Messages sent through firm-approved mediums were retained and monitored. Over 10 years, Qatalyst enforced their policies and procedures censuring and/or fining at least 17 personnel at all levels for violations of Qatalyst’s policies and procedures.
In March 2024, Qatalyst voluntarily contacted the SEC regarding certain off-channel communications activity that Catalyst had identified related to its business.
Qatalyst’s Violations
According to the SEC, “Qatalyst…failed to implement a system reasonably expected to determine whether all personnel, including supervisors, were following Qatalyst’s policies and procedures.” Going further, the SEC stated “Qatalyst failed to implement sufficient monitoring to ensure that its recordkeeping and communications policies and procedures were always being followed.”
Takeaways
Qatalyst escaped financial penalties. In order to do so, the SEC credited Qatalyst’s self-reporting, cooperation, remedial efforts and self-policing. This was a great result for Qatalyst and provides more than a few examples of what steps and tools firms can take to help mitigate SEC scrutiny and penalties.
However, is the standard the SEC applied to Qatalyst attainable?
According to the SEC, Qatalyst failed to implement a system reasonably expected to determine whether all personnel were following its policies and procedures and failed to ensure its policies were always being followed [emphasis added].
No system is perfect. Qatalyst implemented more than a few safeguards, added tools and resources as new communication methods developed, consistently trained employees and censured non-compliance and yet they found themselves in the SEC’s enforcement vortex. What more can the SEC expect from firms when it comes to retaining and monitoring electronic communications?