Goldman Sachs, Morgan Stanley and Bank of America are among 16 Wall Street institutions that have agreed to pay a collective $1.8 billion for failing to properly keep records of electronic communications.
The Securities and Exchange Commission said Sept. 27 that 16 large banks, their affiliates and other financial services firms would pay a collective $1.1 billion after they acknowledged violations of record-keeping provisions of federal securities laws. The banks each agreed to pay $125 million. Two firms, Jefferies and Nomura Securities International, agreed to pay a penalty of $50 million each, while Cantor Fitzgerald agreed to pay $10 million.
The Commodity Futures Trading Commission
The SEC found that, from January 2018 to September 2021, employees of the firms routinely used text messaging on their personal devices to communicate with each other about business matters. The firms violated federal law by failing to keep records of what was being said through these channels.
The SEC said the absence of records had most likely hindered federal officials in their previous investigations of the brokerages. The regulator said the record-keeping violations were committed by all ranks of employees, from senior and junior debt and equity traders to investment bankers, supervisors and senior executives.
The SEC's announcement follows on a similar $125 million penalty levied against J.P. Morgan Securities in December after employees there were likewise found to have used text messages, the WhatsApp messenger service and personal email accounts to talk to each other about business matters. Like the firms in the SEC's latest announcement, J.P. Morgan was called to account for not maintaining records of these communications.
Eric Badway, chairman of the Securities Industry Group at Philadelphia-based law firm Fox Rothschild, said that it's not only large firms that are now subject to these sorts of investigations. Some of his clients at small and medium-sized firms have also had their internal communications scrutinized by SEC and FINRA officials. He recommended that clients conduct all business matters on company email or through other forms of communication for which it's easy to maintain records.
Badway acknowledged that federal regulators have a hard time keeping up with the ever-changing world of electronic communication, especially as the pandemic sent people home to work remotely.
"The problem is there is no specific guidance from the SEC or FINRA on the use of messaging apps or on things like Facebook and Instagram," he said. "If they just said, 'Don't use those,' that would make it easier. Or if you have to use these personal messaging apps, you can only use them through your firm, or through a business account, say through something like LinkedIn."
The eight large Wall Street firms involved in the SEC's latest case are:
- Barclays Capital
- BofA Securities, along with its affiliates Merrill Lynch
- Citigroup Global Markets
- Credit Suisse Securities
- Deutsche Bank Securities, along with affiliates DWS Distributors and DWS Investment Management Americas
- Goldman Sachs
- Morgan Stanley
- UBS Securities, along with UBS Financial Services
The one investment advisor involved — DWS Investment Management Americas, which is majority owned by Deutsche Bank — was charged with violating similar provisions of the Investment Advisers Act of 1940.
In addition to paying penalties, the firms agreed to enlist compliance consultants to review their internal policies and procedures governing the retention of records of communications on personal devices.
SEC Chairman Gary Gensler said in a statement that federal record-keeping rules have been in place to protect investors and markets since the 1930s.
"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," he said. "As part of our examinations and enforcement work, we will continue to ensure compliance with these laws."
