US market regulators have collectively fined 15 broker-dealers, one affiliated investment adviser, plus the swap dealer and futures commission merchant (FCM) affiliates of 11 financial institutions a totls of US$1.8 billion for “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications”, with regulatory investigations uncovering “pervasive off-channel communications.”
The firms fined by the Securities and Exchange Commission (SEC) admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of more than US$1.1 billion, and have begun implementing improvements to their compliance policies and procedures to settle these matters.
- The following eight firms (and five affiliates) have agreed to pay penalties of US$125 million each:
- Barclays Capital;
- BofA Securities Inc. together with Merrill Lynch, Pierce, Fenner & Smith;
- Citigroup Global Markets;
- Credit Suisse Securities (USA);
- Deutsche Bank Securities Inc. together with DWS Distributors Inc. and DWS Investment Management Americas;
- Goldman Sachs & Co;
- Morgan Stanley & Co. together with Morgan Stanley Smith Barney; and
- UBS Securities LLC together with UBS Financial Services.
- The following two firms have agreed to pay penalties of $50 million each:
- Jefferies; and
- Nomura Securities International.
- Cantor Fitzgerald & Co. has agreed to pay a US$10 million penalty.
The Commodity Futures Trading Commission (CFTC) also issued orders simultaneously filing and settling charges against firms for failing to maintain, preserve, or produce records that were required to be kept under CFTC recordkeeping requirements, and failing to diligently supervise matters related to their businesses as CFTC registrants.
The settling registrants admit the facts detailed in the orders, with Bank of America and Nomura neither admitting nor denying certain specific findings of the Division of the Enforcement’s (DOE) investigation, are ordered to cease and desist from further violations of recordkeeping and supervision requirements, and are ordered to engage in specified remedial undertakings.
The settling swap dealers and FCMs and their civil monetary penalties are:
- Bank of America, $100 million
- Barclays, $75 million
- Citi, $75 million
- Credit Suisse, $75 million
- Deutsche Bank, $75 million
- Goldman Sachs, $75 million
- Morgan Stanley, $75 million
- UBS, $75 million
- Nomura, $50 million
- Jefferies, $30 million
- Cantor Fitzgerald, $6 million
“Finance, ultimately, depends on trust. By failing to honour their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust,” said SEC Chair Gary Gensler. “Since the 1930s, such recordkeeping has been vital to preserve market integrity. As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications. As part of our examinations and enforcement work, we will continue to ensure compliance with these laws.”
The firms cooperated with the investigation by gathering communications from the personal devices of a sample of the firms’ personnel. These personnel included senior and junior investment bankers and debt and equity traders.
From January 2018 through September 2021, the firms’ employees routinely communicated about business matters using text messaging applications on their personal devices. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws. By failing to maintain and preserve required records relating to their businesses, the firms’ actions likely deprived the Commission of these off-channel communications in various Commission investigations. The failings occurred across all of the 16 firms and involved employees at multiple levels of authority, including supervisors and senior executives.
Each of the 15 broker-dealers was charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing reasonably to supervise with a view to preventing and detecting those violations. DWS Investment Management Americas, Inc., the investment adviser, was charged with violating certain recordkeeping provisions of the Investment Advisers of 1940 and with failing reasonably to supervise with a view to preventing and detecting those violations.
In addition to the significant financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and were censured. The firms also agreed to retain compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures.
Separately, the Commodity Futures Trading Commission announced settlements with the firms for related conduct.
