11 Wall Street firms fined $289 million for recordkeeping violations by SEC

August 08, 2023 - A crackdown by the Securities and Exchange Commission (SEC) has resulted in charges against 11 Wall Street firms for failing to properly maintain and preserve electronic communications. Today, these firms collectively face penalties amounting to $289 million for their longstanding recordkeeping oversights.

Wells Fargo Securities and its affiliated firms lead the pack with a hefty penalty of $125 million. Close on their heels, BNP Paribas Securities Corp. and SG Americas Securities are each to pay $35 million. BMO Capital Markets and Mizuho Securities have agreed to pay $25 million apiece, with other firms like Houlihan Lokey Capital and Moelis & Company facing penalties ranging from $9 million to $15 million.

The crux of the issue? Employees at these firms were found to frequently use personal messaging platforms such as iMessage, WhatsApp, and Signal for work-related discussions. Unfortunately, the firms did not store the vast majority of these off-the-grid chats, putting them in breach of federal securities laws. This oversight has allegedly hindered the Commission in its various investigations, given that essential records were not kept. Interestingly, this lapse in judgment extended to senior levels, with even executives and supervisors implicated.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasised the significance of compliance with recordkeeping requirements. He stated, "Compliance with the books and records requirements of the federal securities laws is essential to investor protection and well-functioning markets. To date, the Commission has brought 30 enforcement actions and ordered over $1.5 billion in penalties to drive this foundational message home. And while some broker-dealers and investment advisers have heeded this message, self-reported violations, or improved internal policies and procedures, today’s actions remind us that many still have not. So here are three takeaways for those firms who haven’t yet done so: Self-report, cooperate, and remediate. If firms take these steps proactively, they're in a far better position than waiting for the SEC to step in."

“Today’s actions stem from our continuing sweep to ensure that regulated entities, including broker-dealers and investment advisers, comply with their recordkeeping requirements, which are essential for us to monitor and enforce compliance with the federal securities laws. Recordkeeping failures such as those here undermine our ability to exercise effective regulatory oversight, often at the expense of investors,” said Sanjay Wadhwa, Deputy Director of Enforcement. “The 11 firms settling today have acknowledged that their conduct violated the law regarding these crucial requirements, and are implementing measures to prevent future similar violations. However, we know that other SEC-regulated entities have committed similar violations, and so our work to enforce industry-wide compliance continues.”

The SEC’s investigation uncovered pervasive and longstanding “off-channel” communications at all 11 firms. As described in the SEC’s orders, the firms admitted that from at least 2019, their employees often communicated through various messaging platforms on their personal devices, including iMessage, WhatsApp, and Signal, about the business of their employers. 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, certain of the firms likely deprived the Commission of these off-channel communications in various SEC investigations. The failures involved employees at multiple levels of authority, including supervisors and senior executive

In the wake of these violations, the SEC is not only imposing monetary penalties but also demanding improvements in record-keeping practices. Each firm has been mandated to hire independent compliance consultants to thoroughly review their policies concerning the retention of electronic communications on personal devices.

This action by the SEC has come alongsiode a separate and related move by the Commodity Futures Trading Commission, which also announced settlements with some of the same entities for related misconduct.