A couple of years ago, the Securities and Exchange Commission touted its achievement in forcing 40 broker-dealers to fork over $1.6 billion for record-keeping failures. These were related to the firms’ off-channel communications, such as text messages made on personal devices of the firms’ personnel. Now a trade group wants to know how the commission calculated each firm’s fines, and it’s suing to find out.

The American Securities Association has filed suit in U.S. District Court in Florida to force the SEC to turn over enforcement documents detailing how it arrived at the “unprecedented” $1.6 billion in penalties it levied against the broker-dealers for their record-keeping failures.

The ASA, which represents some of the largest regional broker-dealers in the country, said that it filed the lawsuit because the SEC refused to disclose its enforcement records showing penalty calculations and other pertinent information in response to three Freedom of Information Act (FOIA) requests the ASA made in March.

The SEC started settling with firms over their off-channel communication records beginning in late 2021, and continued its work through February 2024. In one of its largest settlements, announced on September 27, 2022, the SEC said 15 broker-dealers and one affiliated investment advisor would be paying $1.1 billion over charges of “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.”

Eight of the firms agreed to pay $125 million each to settle the charges (they included BofA Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Citigroup Global Markets Inc.; and Goldman Sachs & Co. LLC.

Gurbir S. Grewal, the director of the SEC’s Division of Enforcement, said at the time that these settlements “both in terms of the firms involved and the size of the penalties ordered—underscore the importance of recordkeeping requirements: They’re sacrosanct.”

According to the ASA lawsuit, however, the SEC began investigating certain B-D’s retention of off-channel communication records, such as text messages, by demanding “scores of documents from numerous companies without any suspicion that they violated the commission’s rules.”

The investigations also went on during the Covid-19 years, when many employees were forced to work from home, ASA said in its suit.

“There appears to be no rhyme or reason for how the SEC imposed these penalties, and the SEC has provided little explanation into its decision-making,” ASA said in the suit.

“The regulated community thus is left with many questions. How were these penalties calculated? And why were they targeted in the first place? Or, as two SEC Commissioners recently put it, is the SEC’s penalty regime simply ‘a tool to generate numbers for year-end statistics’ rather than ‘a means to achieve outcomes that enhance market integrity and investor protection?’”

To get more information about the agency’s penalty calculations, the ASA submitted a FOIA requests asking the agency to produce all records regarding its “recordkeeping sweep initiative,” including all information used to calculate, determine and propose penalties, fines and other sanctions associated with the sweep.

The “SEC has refused to comply with its legal obligations. Indeed, the SEC has not produced a single document in response to ASA’s FOIA requests,” the trade group said in the lawsuit.

Instead, the SEC pointed to exemptions when the disclosures could “reasonably be expected to interfere” with ongoing or prospective enforcement proceedings.

“But the SEC concedes that ASA is seeking documents from settled proceedings,” the trade group said in its suit. The trade group argues that the SEC cannot withhold documents simply because it may bring different enforcement proceedings against other, unrelated entities. “Such an outcome would license agencies to withhold documents in perpetuity,” the ASA said.

The SEC records will help the public understand how and why the SEC brought the fines it did, the trade group argued.

“After the dust settles, those who were targeted by the SEC are left to wonder how it all happened. Why did the SEC choose to target certain companies for suspicion-less investigations? How did the SEC arrive at the penalties it imposed?” the ASA asked in its lawsuit.

The SEC has no published guidelines or formulae “explaining why it threw the book at one company while giving another similar company a slap on the wrist. To the public and the regulated community, the SEC appears to set the dollar amount of fines in each case inconsistently and unpredictably,” ASA added.

The ASA’s president and CEO, Chris Iacovella, said in an email to Financial Advisor magazine, “Unfortunately, the SEC has failed to comply with its FOIA obligations, and that is why ASA filed this lawsuit. The American public must have transparency into the SEC’s enforcement process.” 

The ASA is represented by the law firm of Consovoy McCarthy.