Firms admit to wrongdoing and agree to pay penalties totaling more than $1.1 billion

On Tuesday, September 27, 2022, the Securities and Exchange Commission announced charges against 15 broker-dealers and one affiliated investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of more than $1.1 billion, and have begun implementing improvements to their compliance policies and procedures to settle these matters.

• The following eight firms (and five affiliates) have agreed to pay penalties of $125 million each:
  • Barclays Capital Inc.;
  • BofA Securities Inc. together with Merrill Lynch, Pierce, Fenner & Smith Inc.;
  • Citigroup Global Markets Inc.;
  • Credit Suisse Securities (USA) LLC;
  • Deutsche Bank Securities Inc. together with DWS Distributors Inc. and DWS Investment Management Americas, Inc.;
  • Goldman Sachs & Co. LLC;
  • Morgan Stanley & Co. LLC together with Morgan Stanley Smith Barney LLC; and
  • UBS Securities LLC together with UBS Financial Services Inc.

• The following two firms have agreed to pay penalties of $50 million each:
  • Jefferies LLC; and
  • Nomura Securities International, Inc.

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

“Finance, ultimately, depends on trust. By failing to honor their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust,” said SEC Chair Gary Gensler. “Since the 1930s, such recordkeeping 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.”

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The SEC staff’s investigation 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.

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, in violation of the federal securities laws. 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.

“Today’s actions – both in terms of the firms involved and the size of the penalties ordered – underscore the importance of recordkeeping requirements: they’re sacrosanct. If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “These 16 firms not only have admitted the facts and acknowledged that their conduct violated these very important requirements, but have also started to implement measures to prevent future violations. Other broker dealers and asset managers who are subject to similar requirements under the federal securities laws would be well-served to self-report and self-remediate any deficiencies.”

“These actions deliver a straightforward message to registrants: You are expected to abide by the Commission’s recordkeeping rules,” said Sanjay Wadhwa, Deputy Director of Enforcement. “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 J.P. Morgan Securities LLC, the staff will continue its efforts to enforce compliance with the Commission’s essential recordkeeping requirements.”

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

In addition to the significant financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and were censured. The firms also agreed to retain compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures.

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

The SEC’s investigation, which is ongoing, is being conducted by Zachary Sturges and Karen Willenken of the New York Regional Office, Ian Rupell of the SEC’s Headquarters, and HelenAnne Listerman and Jessica Neiterman of the Asset Management Unit. The case is being supervised by Thomas P. Smith Jr., Osman Nawaz, Carolyn Welshhans, Corey Schuster, and Laura Josephs.

Source: U.S. Securities and Exchange Commission