Wall Street Faces Nearly $2B in Penalties Over Record Keeping

The U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) have levied more than $1.8 billion in penalties on various Wall Street firms for record-keeping failures. The SEC action targets 16 firms, with 11 of them having agreed to pay a combined $1.1 billion. The CFTC action covers 11 institutions, with total penalties in excess of $710 million.

The SEC says in its announcement that there has been “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.” The CFTC indicates that the 11 firms targeted by its action have been guilty of “failing to maintain, preserve, or produce records that were required to be kept under CFTC recordkeeping requirements, and failing to diligently supervise matters related to their businesses as CFTC registrants.”

Targets of the SEC Action

The SEC fined each of these eight firms, including five affiliates, $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
• UBS Securities LLC, together with UBS Financial Services Inc.

Additionally, penalties of $50 million are being assessed on Jefferies LLC and Nomura Securities International, Inc. Meanwhile, Cantor Fitzgerald & Co. has agreed to pay a $10 million penalty.

Targets of the CFTC Action

The 11 firms being fined by the CFTC, and their respective penalties, are:

• Bank of America (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), $100 million
• Barclays (Barclays Bank, PLC and Barclays Capital Inc.), $75 million
• Cantor Fitzgerald (Cantor Fitzgerald & Co.), $6 million
• Citi (Citibank, N.A.; Citigroup Energy Inc.; and Citigroup Global Markets Inc.), $75 million
• Credit Suisse (Credit Suisse International and Credit Suisse Securities (USA) LLC), $75 million
• Deutsche Bank (Deutsche Bank AG and Deutsche Bank Securities Inc.), $75 million
• Goldman Sachs (Goldman Sachs & Co. LLC f/k/a Goldman Sachs & Co.), $75 million
• Jefferies (Jefferies Financial Services, Inc. and Jefferies LLC), $30 million
• Morgan Stanley (Morgan Stanley & Co. LLC; Morgan Stanley Capital Services LLC; Morgan Stanley Capital Group Inc.; and Morgan Stanley Bank, N.A.), $75 million
• Nomura (Nomura Global Financial Products Inc.; Nomura Securities International, Inc.; and Nomura International PLC), $50 million
• UBS (UBS AG; UBS Financial Services, Inc.; and UBS Securities LLC), $75 million

Note that, while the CFTC press release indicates that more than $710 million in fines have been levied against these 11 firms, the figures above add up to only $661 million.

The Text Messaging Issue

The SEC investigation “uncovered pervasive off-channel communications.” More specifically: “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.”

The CFTC press release indicates that each of the 11 firms that it targeted: “failed to stop its employees, including those at senior levels, from communicating both internally and externally using unapproved communication methods, including messages sent via personal text, WhatsApp or Signal.” Furthermore, the CFTC says, these firms “generally did not maintain and preserve these written communications,” which they were required to do.

Paying the fines is hardly the end of the line for the banks involved. Several of them, including Citigroup Inc, and Goldman Sachs Group Inc., must now to hire compliance consultants to ensure proper work-related communications, including those by phone, according to Bloomberg.