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SEC Settles First Off-Channel Communications Enforcement Action with Standalone Investment Adviser

April 10, 2024
Client Alert
On April 3, 2024, the U.S. Securities and Exchange Commission (SEC) settled an administrative action against Senvest Management LLC (Senvest) for alleged recordkeeping, policies and procedures, and failure to supervise violations related to off-channel communications (the use of text messaging and other electronic communication services that fall outside of the adviser’s official recordkeeping channels).1 Although the SEC has previously settled actions against investment advisers who were dually registered as, or affiliated with, a broker-dealer, this is the first action against a standalone investment adviser brought pursuant to the Investment Advisers Act of 1940 (IAA).

This is also the first time the SEC has charged an investment adviser for failing to adopt and implement written policies and procedures reasonably designed to prevent violations of the IAA concerning off-channel communications. In settling the matter, Senvest admitted to the facts of the violation and agreed to pay a $6.5 million civil penalty, cease and desist from further violations, a censure, and to implement improvements to its compliance policies and procedures.

SEC Finds Violations of IAA and Senvest Policies

The books and records provisions of the IAA, including Rule 204-2(a)(7), are more limited than the books and records provisions applicable to broker-dealers. Investment advisers are required to preserve all communications received and copies of all written communications sent relating to specified records, including recommendations made or proposed to be made and any advice given or proposed to be given; any receipt, disbursement or delivery of funds or securities; or the placing or execution of any order to purchase or sell any security. Pursuant to Rule 17a-4(b)(4), promulgated under Section 17(a)(1) of the Securities Exchange Act of 1934, broker-dealers are required to maintain books and records relating to their “business as such.”

Read the full article here.

1 In the Matter of Senvest Management, Release No. IA-6581 (April 3, 2024). The order also notes that certain Senvest employees failed to adhere to the firm’s code of ethics provisions in violation of Section 204A of the IAA and Rule 204A-1 promulgated thereunder. Senvest’s code of ethics requires employees to obtain pre-clearance for all securities transactions in their personal accounts. According to the order, Senvest failed to implement this requirement and thus failed to detect pre-clearance failures.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

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