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SEC Continues Crackdown on Off-Channel Communications; Fines HSBC and Scotia Bank More than $22 Million

The Securities and Exchange Commission continues its crackdown on unmonitored electronic messaging with more than $22 million in fines to HSBC Securities Inc. and Scotia Capital Inc. for “widespread and longstanding failures” by the two firms and their employees to properly maintain and preserve electronic communications.

The registered broker-dealers settled the charges by acknowledging that their conduct violated recordkeeping provisions of the federal securities laws.

HSBC agreed to pay penalties of $15 million while Scotia agreed to pay penalties of $7.5 million to settle the charges.

The investigation “uncovered pervasive and longstanding use” of off-channel communications regarding securities business matters using messaging platforms. As described in the SEC’s orders, the firms admitted that their employees often communicated “off-channel” about securities business matters on their personal devices, using messaging platforms, such as WhatsApp.

Neither firm maintained or preserved the substantial majority of these communications, in violation of the federal securities laws. The failings involved employees at multiple levels of authority, including supervisors and senior executives. Both HSBC Securities and Scotia Capital cooperated with the SEC’s investigation by, among other things, self-reporting the recordkeeping failures after gathering communications from the personal devices of a sample of the firms’ personnel.

“Today’s actions should not only remind firms of the importance of following SEC recordkeeping requirements, but also the value of disclosing violations when they do occur,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Both HSBC and Scotia Capital self-reported and self-remediated their recordkeeping violations, and the reduced penalties in these cases reflect their efforts and cooperation. As we continue our efforts to ensure compliance with the Commission’s essential recordkeeping requirements, we encourage other firms to take note and likewise self-report.”

Both firms were charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to reasonably supervise with a view to preventing and detecting those violations. In addition to the financial penalties, each firm was ordered to cease and desist from committing violations of the relevant recordkeeping provisions and was 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.

Previously, on September 27, 2022, the SEC released eleven nearly identical orders against Deutsche Bank Securities Inc., Barclays Capital Inc., Citigroup Global Markets Inc., BofA Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC, Jefferies LLC, Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC, Nomura Securities International Inc., Credit Suisse Securities (USA) LLC, Cantor Fitzgerald & Co., UBS Financial Services Inc. and UBS Securities LLC with findings of willful violations of the communication preservation requirements of the SEC.

As The DI Wire previously reported in December 2021, The Securities and Exchange Commission charged J.P. Morgan Securities LLC for failing to maintain and preserve written communications. The firm agreed to pay a $125 million penalty.

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