On 23 September 2024, the U.S. Securities and Exchange Commission (SEC) announced settled charges against Atom Investors LP, a Texas-based registered investment adviser, for violations of federal securities laws related to the firm’s failure to maintain and preserve critical off-channel communications. The US SEC did not impose any civil penalty on Atom Investors due to the firm’s self-reporting of the violations, substantial cooperation with the US SEC, and prompt remediation efforts.
The US SEC’s order found that Atom Investors violated the recordkeeping provisions of the United States Investment Advisers Act of 1940 by failing to preserve records, including senior personnel communications, which were subject to federal retention requirements. Without admitting or denying the US SEC’s findings, Atom Investors consented to a cease-and-desist order and received a censure for its violations. Due to the firm’s immediate self-reporting, proactive remedial measures, and significant cooperation with the US SEC during the investigation, the Commission did not impose any monetary penalties as part of the settlement.
In 2021, the US SEC issued a subpoena to Atom Investors in connection with an investigation of a third party. During the process of responding to the subpoena, Atom Investors discovered that it had failed to maintain and preserve required records for over three years. These records, which were subject to federal securities laws, included crucial communications made by senior personnel, particularly regarding recommendations and advice related to purchasing or selling securities.
The issue became clear when Atom Investors acknowledged that these communications, which should have been preserved under recordkeeping requirements, were missing or incomplete. The firm realised that this lapse occurred over a three-year period, severely hampering the SEC’s ability to conduct its investigation into the third party.
The Atom Investors LP breached the recordkeeping provisions under Section 204(a) of the United States Investment Advisers Act of 1940 and United States’ Rule 204-2 there under. These sections require investment advisers to make and keep certain records relating to their advisory business, and to furnish copies of such records upon request. Over a period of more than three years, Atom Investors failed to preserve off-channel communications, which were subject to these recordkeeping requirements. These communications included records related to recommendations and advice on securities transactions, and involved personnel at senior levels of the firm. Atom Investors breached its duty by failing to produce relevant records when requested by the US SEC during the course of its subpoena, further exacerbating the firm’s non-compliance with its recordkeeping obligations.
Following this discovery, Atom Investors self-reported the recordkeeping violations to the US SEC. The firm immediately undertook remedial measures to address the compliance gaps, including updating its internal systems and protocols to ensure full compliance with the recordkeeping obligations set out by federal securities laws.
Recognising the firm’s cooperation and self-reporting, the US SEC conducted its investigation and determined that although Atom Investors had committed serious breaches of recordkeeping provisions, the firm’s response mitigated the severity of the case. Consequently, Atom Investors avoided monetary penalties, as the US SEC considered the firm’s remediation efforts and cooperation throughout the investigation.
(Source: https://www.sec.gov/newsroom/press-releases/2024-143, https://www.sec.gov/files/litigation/admin/2024/ia-6719.pdf)
