CFTC and SEC Order Financial Institutions to Pay $1.8 Billion for Recordkeeping and Supervision Failures | Practical Law

CFTC and SEC Order Financial Institutions to Pay $1.8 Billion for Recordkeeping and Supervision Failures | Practical Law

The CFTC and SEC took action against 11 major financial institutions and their registered affiliates for widespread use of unapproved communication methods resulting in widespread recordkeeping and supervision failures.

CFTC and SEC Order Financial Institutions to Pay $1.8 Billion for Recordkeeping and Supervision Failures

by Practical Law Finance
Published on 20 Oct 2022 • USA (National/Federal)
The CFTC and SEC took action against 11 major financial institutions and their registered affiliates for widespread use of unapproved communication methods resulting in widespread recordkeeping and supervision failures.
On September 27, 2022:
  • The CFTC announced it had issued 11 separate orders, each filing and settling charges against swap dealer (SD) and futures commission merchant (FCM) affiliates of major financial institutions, each of which failed to maintain, preserve, or produce records that were required to be kept under CFTC recordkeeping requirements and failed to diligently supervise matters related to their businesses as CFTC registrants in violation of the Commodity Exchange Act (CEA) and related CFTC regulations (see CFTC Orders).
  • The SEC announced the entry of 11 separate orders filing and settling charges against 16 major financial institutions for recordkeeping and supervision violations involving widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications in violation of the Securities Exchange Act of 1934, as amended (Exchange Act) and related the federal securities regulations, which require broker-dealers to preserve for at least three years originals of all communications received and copies of all communications sent relating to its business (see SEC Orders).

CFTC Orders

Each order found that, for a period of years, each of the 11 respondent firms and their affiliates when acting as an SD and/or FCM failed to stop its employees from communicating both internally and externally using unapproved communication methods, including messages sent via personal text, WhatsApp, or Signal. Each order also noted that the widespread use of unapproved communication methods used by these entities violated the SDs’ and/or FCMs’ internal policies and procedures, which prohibited business-related communication to take place via unapproved methods. Each order also found that some of the same supervisory personnel responsible for ensuring compliance with the firms’ policies and procedures themselves used non-approved methods of communication in violation of firm policy.
Under each order, the CFTC found that during the relevant period, each of the respondent firms had failed to:
  • Maintain required records in violation of Sections 4s(f)(1)(C) and 4s(g)(1) and (3) of the CEA and CFTC Regulations 23.201(a) and 23.202(a)(1) and (b)(1).
  • Keep required records in violation of Section 4g of the CEA and CFTC Regulation 1.35.
  • Keep records in required manner in violation of CFTC Regulation 1.31.
  • Supervise diligently its business in violation of Section 4s(h)(1)(B) of the CEA and CFTC Regulation 23.602(a).
  • Diligently supervise the handling of commodity interest accounts in violation of Regulation 166.3.
The following CFTC orders imposed civil monetary penalties aggregating more than $710 million on the following entities:
  • Bank of America order: Bank of America, N.A.; BofA Securities, Inc.; and Merrill Lynch, Pierce, Fenner & Smith Incorporated (which was registered as an FCM until May 2019 and is currently registered as an introducing broker (IB)), $100 million.
  • Barclays order: Barclays Bank, PLC, and Barclays Capital Inc., $75 million.
  • Cantor Fitzgerald order: Cantor Fitzgerald & Co., $6 million.
  • Citi order: Citibank, N.A.; Citigroup Energy Inc.; and Citigroup Global Markets Inc., $75 million.
  • Credit Suisse order: Credit Suisse International and Credit Suisse Securities (USA) LLC, $75 million.
  • Deutsche Bank order: Deutsche Bank AG and Deutsche Bank Securities Inc., $75 million
  • Goldman Sachs order Goldman Sachs & Co. LLC f/k/a Goldman Sachs & Co., $75 million.
  • Jefferies order: Jefferies Financial Services, Inc. and Jefferies LLC, $30 million.
  • Morgan Stanley order: Morgan Stanley & Co. LLC; Morgan Stanley Capital Services LLC; Morgan Stanley Capital Group Inc.; and Morgan Stanley Bank, N.A., $75 million.
  • Nomura order: Nomura Global Financial Products Inc.; Nomura Securities International, Inc.; and Nomura International PLC, $50 million.
  • UBS order: UBS AG; UBS Financial Services, Inc. and UBS Securities LLC, $75 million.

SEC Orders

According to the SEC, from January 2018 through September 2021, each of the 16 respondent firms’ employees routinely communicated about business matters using text messaging applications on their personal devices. The firms also did not maintain or preserve the substantial majority of these off-channel communications in violation of the federal securities laws, which require broker-dealers to preserve for at least three years originals of all communications received and copies of all communications sent relating to its business as such.
According to the SEC, by failing to maintain and preserve required records relating to their businesses, the actions of the 16 firms likely deprived the SEC of these off-channel communications in various SEC investigations. The SEC noted that these failings occurred across all of the 16 firms and involved employees at multiple levels of authority, including supervisors and senior executives.
The SEC charged each of the 15 broker-dealers with violating certain recordkeeping provisions under Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) under the Exchange Act and with failing reasonably to supervise with a view to preventing and detecting those violations within the meaning of Section 15(b)(4)(E) of the Exchange Act (see Practice Note, Broker-Dealer Recordkeeping).
The SEC also charged DWS Investment Management Americas, Inc., the investment adviser affiliated as an indirect subsidiary of Deutsche Bank Securities Inc., with violating certain recordkeeping provisions of Section 204 the Investment Advisers Act of 1940 (Advisers Act) and Rule 204-2(a)(7) under the Advisers Act and with failing reasonably to supervise with a view to preventing and detecting those violations within the meaning of Section 203(e)(6) of the Advisers Act.
The following SEC orders imposed civil monetary penalties aggregating more than $1.1 billion on the following entities: