By Alexander Jones, International Banker
On August 14, the U.S. Securities and Exchange Commission (SEC) announced that 26 financial firms had been charged with what it described as “widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications”. The charges represent one of the latest rounds of penalties handed out to firms for not keeping sufficient records of employees’ work-related communications via such online messaging platforms as WhatsApp and iMessage. And with the probe having since expanded to ensnare many more financial firms, including a round of fines delivered to credit-rating agencies, the multi-year “texting probe” launched by the SEC and the Commodity Futures Trading Commission (CFTC) in 2021 appears far from over.
Financial firms are required by the United States’ chief financial regulators to monitor and save all business-related communications to avoid potential misconduct charges. But the SEC’s investigation into the 26 firms “uncovered pervasive and longstanding use of unapproved communication methods”, also known as “off-channel communications”, that were required under US federal securities laws to be maintained. “As today’s enforcement actions against more than two dozen firms reflect, we remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement prior to his departure from the commission on October 11.
Section 17(a)(1) of the Exchange Act, for instance, authorises the SEC to issue rules requiring firms to “make and keep for prescribed periods, and furnish copies of, such records as necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of the Exchange Act”. Such firms are required to preserve these records for at least three years—the first two years in an easily accessible place, including “originals of all communications received and copies of all communications sent” relating to the firm’s business.
The firms acknowledged that their conduct had violated the recordkeeping provisions of those laws, with their failures to maintain and preserve online messages depriving the SEC of key communications in its investigations, and that personnel at multiple levels of authority, including supervisors and senior managers, had been involved. As such, the firms agreed to pay combined civil penalties of $392.75 million, with the biggest fines—each of $50 million—being levied on Ameriprise Financial, Edward D. Jones & Co., LPL Financial and Raymond James & Associates.
The most notable firms that were charged, moreover, included RBC Capital Markets, which agreed to pay a $45-million penalty; BNY Mellon Securities Corporation (BNYMSC), which, together with its subsidiary, BNY Pershing, consented to pay $40 million; and TD Securities (USA) LLC, which, together with TD Wealth Private Client and Epoch Investment Partners, agreed to pay a $30-million penalty. Separately, the CFTC announced settlements with the Toronto-Dominion Bank, Cowen and Company and Truist Bank for related conduct.
In terms of specific violations, the published SEC order for BNYMSC, for example, revealed that a desk head within the firm had deleted messages from his personal phone prior to the commission’s investigation. “Still-extant records reflect that he exchanged numerous off-channel business-related text messages with at least 40 colleagues at BNYMSC and affiliated entities,” the order stated. “These iMessage and WhatsApp messages related to the broker-dealer’s business.” Another senior executive at BNYMSC, meanwhile, had enabled an autodelete function on his personal iPhone, but he had retained some messages on his personal iPad. “He exchanged off-channel business-related messages with at least seven colleagues at BNYMSC and affiliated entities, including five colleagues he supervised,” according to the SEC’s findings. “These 5 colleagues included other BNYMSC officers, a senior officer, and a senior vice president. These messages related to the broker-dealer’s business and were exchanged over iMessage.”
To the credit of BNYMSC and several other firms cited in the probe, however, the SEC acknowledged the level of cooperation they provided, with the BNYMSC order noting that respondents voluntarily interviewed a sampling of senior personnel from BNYMSC and Pershing, including senior leadership such as managing directors and desk heads, and gathered and reviewed messages found on the individuals’ personal devices.
And with three of the named firms—Cetera Advisor Networks, Truist Securities and HilltopSecurities—self-reporting their violations, the SEC confirmed that they ended up paying lower penalties than would have otherwise been the case of $4.5 million, $5.5 million and $1.6 million, respectively. “Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation,” Director Grewal noted.
Nonetheless, the regulators’ investigative sweep since August’s round of settlements only seems to be gathering pace. On September 4, the SEC charged six credit-rating organisations with more than $49 million in civil penalties—including the Big Three, comprising Moody’s Investors Service ($20 million), S&P Global Ratings ($20 million) and Fitch Ratings ($8 million)—again due to “significant failures” by these firms and their personnel to maintain and preserve electronic communications. The SEC confirmed that the six firms had already started implementing improvements to their compliance policies and procedures to address the violations.
“We have seen repeatedly that failures to maintain and preserve required records can hinder the staff’s ability to ensure that firms are complying with their obligations and the Commission’s ability to hold accountable those that fall short of those obligations, often at the expense of investors,” said Sanjay Wadhwa, then deputy director and new acting director of the SEC’s Division of Enforcement, in response to the charges. “In today’s actions, the Commission once again makes clear that there are tangible benefits to firms that make significant efforts to comply and otherwise cooperate with the staff’s investigations.”
On September 24, firms including Stifel, Nicolaus & Company, Invesco Distributors and the Canadian Imperial Bank of Commerce (CIBC) agreed to pay a combined $100 million to settle charges from the SEC and the CFTC, again as part of their multi-year texting probe.
Indeed, texting and electronic-communications violations have continued to flare up frequently since the launch of the investigation in late 2021, resulting in the SEC doling out more than $2 billion in charges to date against approximately 75 firms for such electronic-communications-related failures. In December 2021, JPMorgan Chase, for instance, paid a whopping $200 million in fines—$125 million to the SEC and $75 million to the CFTC—for its recordkeeping violations, which involved unapproved communications through WhatsApp and other online messaging platforms dating back to 2015.
In September 2023, Goldman Sachs fired several of its Transaction Banking (TxB) unit’s senior executives, including its global head, Hari Moorthy, for violating the firm’s communication policy by using personal devices to communicate about work-related matters. According to the Wall Street Journal, which viewed an internal Goldman memo, the executives’ lack of cooperation with an internal probe by the bank’s compliance team was ultimately crucial in sealing their fate at the firm. “Firm leadership has repeatedly stressed the importance of this policy via a number of firmwide communications and in other forums, including at the divisional level,” the memo read.
In the future, it seems that the SEC’s and the CFTC’s investigations will only further expand, potentially shifting focus towards the likes of leading asset managers, private-equity firms and other systemically important financial institutions. Indeed, major players, including BlackRock, Blackstone and Invesco, have all acknowledged that they have been contacted in relation to the probe. A recent filing by Invesco also showed that the investment-management firm had set aside $50 million as a result of the SEC’s investigation and “a separate regulatory matter”, while in its second-quarter results, US banking firm Charles Schwab stated that its expenses included $43 million in accruals “in connection with an industry-wide regulatory review of off-channel communications”.
The SEC itself has even cracked down on internal usage of such messaging apps, implementing a firmwide block against them in April from employees’ work mobile devices. The agency restricted access to third-party messaging applications, as well as SMS (short message service) and iMessage texts, “to lower [the] risk that our systems could be compromised and to enhance recordkeeping,” a SEC spokeswoman confirmed in an emailed statement to Bloomberg in mid-April.
Some are not in full agreement with the way that fines have been meted out thus far, however. “The regulators burdened the lives not only of the brokerage firms but of the executives for having to download, hold, produce, evaluate all of this information in a landscape where people text. It’s the way people communicate these days; that isn’t going to change,” Ghillaine Reid, a partner at the securities-focused law firm Troutman Pepper Hamilton Sanders (Troutman Pepper), said in October 2023 during a panel discussion at the New York City Bar Association’s Compliance Institute.
“Our concern with expanding the scope of this investigation and these examinations to cover asset managers is that the SEC may be broadly going over what is actually required,” Kenneth Fang, associate general counsel at the Investment Company Institute, a global association of regulated funds, explained to the Financial Times on August 18. “We are strongly concerned that the SEC is attempting to exceed its authority under the Advisers Act and engaging in rulemaking by enforcement through its current sweep regarding off-channel communications,” the institute noted in a previous letter to the financial-services watchdog.