Compliance

SEC Punishes Banks, Brokers Over Messaging Apps

Tom Burroughes, Group Editor, 29 September 2022

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The use or misuse of messaging apps such as WhatsApp raises questions about appropriate record-keeping by banks and other institutions. The SEC has punished more than a dozen institutions.    

US regulators have charged a raft of firms and brokerages for failing to control their employees’ use of messaging apps, underscoring how these communication channels are a pain point for financial institutions.

This week, the Securities and Exchange Commission announced charges against 15 broker-dealers and one affiliated investment advisor for “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.”

The SEC said in a statement that the firms, such as Goldman Sachs, Barclays, Nomura and Cantor Fitzgerald, had “acknowledged that their conduct violated record-keeping provisions of the federal securities laws.” The organisations, which have agreed to pay combined penalties of more than $1.1 billion, have begun to tighten controls.

The following eight firms (and five affiliates) have agreed to pay penalties of $125 million each:

-- Barclays Capital;

-- BofA Securities together with Merrill Lynch, Pierce, Fenner & Smith Inc;

-- Citigroup Global Markets Inc;

-- Credit Suisse Securities (USA);

-- Deutsche Bank Securities Inc together with DWS Distributors and DWS Investment Management Americas;

-- Goldman Sachs & Co. LLC;

-- Morgan Stanley & Co together with Morgan Stanley Smith Barney LLC; and

-- UBS Securities LLC together with UBS Financial Services.

Jefferies and Nomura Securities International have agreed to pay penalties of $50 million each.

Cantor Fitzgerald & Co. has agreed to pay a $10 million penalty.

The SEC and other regulators around the world have targeted firms’ use of apps such as WhatsApp and other channels to communicate with clients. At a time when cybersecurity remains a hot issue – as shown by recent leaks of information – watchdogs are concerned that such channels create undue risks. They also fear that non-traditional routes could breach insider trading and other rules.

A problem, however, is that many clients digest information via social media and similar routes. The world of investor relations is also being changed by what is sometimes called “IR3.0.” The term takes a holistic approach to IR and brings together both institutional and non-institutional investor networks, making best use of content, not just research content. It reaches into multiple channels and routes such as LinkedIn, Google, Twitter and through the smart use of digital marketing techniques.

“Finance, ultimately, depends on trust. By failing to honour their record-keeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust,” SEC chair Gary Gensler, said. “Since the 1930s, such record-keeping 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 SEC said that its probe uncovered “pervasive off-channel communications.”

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, the SEC said.

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, acting in violation of the federal securities laws, the SEC said.

“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,” the SEC said.

“These actions deliver a straightforward message to registrants: You are expected to abide by the Commission’s record-keeping rules,” Sanjay Wadhwa, deputy director of enforcement, said. “The time is now to bolster your record retention processes and to fix issues that could result in similar future misconduct by firm personnel. In line with this first-of-its-kind group resolution and our December 2021 settlement with JP Morgan Securities LLC, the staff will continue its efforts to enforce compliance with the Commission’s essential record-keeping requirements.”

Each of the 15 broker-dealers were charged with violating certain record-keeping 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 advisor, was charged with violating certain record-keeping provisions of the Investment Advisers Act of 1940 and with failing reasonably to supervise with a view to preventing and detecting those violations.

Separately, the Commodity Futures Trading Commission announced settlements with the firms for related conduct.

How the industry should react
Reacting to the fines, Fabian Grande, lead product manager for the Engage product line at Swiss technology firm Avaloq, said that the industry should change how it handles communications. 

“It is our view that mobile banking will remain a central theme of the financial industry, especially within the wealth management space over the coming years. The pace of communication is only accelerating as modern wealth clients are seeking a more personal relationship with their banks," Grande said. 

"To bring convenience and the seamless client experience back in the client and relationship manager (RM) communications, financial institutions should consider investing in build-in chat capabilities and a secure and compliant environment instead of banning social messaging from their client relationships. In order to address the compliance issue of the communication tool between RMs and clients, the RMs endpoint could be embedded into the safe banking environment so that the financial institutions are able to keep full control, transparency and auditability of the relationship managers interaction with the client," he continued.

"Not only will this ensure preservation of communications and avoid firms facing hefty fines in the future, but the seamless digital customer experience incorporated in such apps help increase efficiency in communications and strengthen client relationships," Grande added.

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