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SEC Issues $539 Million of Fines in Expanding Crackdown on Use of Private Messaging by Broker-Dealers

Several Wall Street Firms have been fined more than $500 million for using various private communication applications for business.

The Securities and Exchange Commission announced charges against at least 10 firms in their capacity as broker-dealers and one dually registered broker-dealer and investment adviser for “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.”

As The DI Wire previously reported in May 2023, the SEC levelled more than $22 million in fines to HSBC Securities Inc. and Scotia Capital Inc. over private messaging.

The most recently fined firms admitted the facts set forth in their respective SEC orders. They acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of $289 million as outlined below, and have begun implementing improvements to their compliance policies and procedures to address these violations.

  • Wells Fargo Securities LLC together with Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC agreed to pay a $125 million penalty;
  • BNP Paribas Securities Corp. and SG Americas Securities LLC have each agreed to pay penalties of $35 million;
  • BMO Capital Markets Corp. and Mizuho Securities USA LLC have each agreed to pay penalties of $25 million;
  • Houlihan Lokey Capital Inc. has agreed to pay a $15 million penalty;
  • Moelis & Company LLC and Wedbush Securities Inc. have each agreed to pay penalties of $10 million; and
  • SMBC Nikko Securities America Inc. has agreed to pay a $9 million penalty.

The SEC’s investigation uncovered pervasive and longstanding “off-channel” communications at all 11 firms. As described in the SEC’s orders, the firms admitted that from at least 2019, their employees often communicated through various messaging platforms on their personal devices, including iMessage, WhatsApp, and Signal, about the business of their employers. The failures involved employees at multiple levels of authority, including supervisors and senior executives.

According to the SEC, 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, the SEC says certain of the firms likely deprived the Commission of these off-channel communications in various SEC investigations.

Each of the broker-dealers was 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.” Wedbush Securities Inc., a dually registered broker-dealer and investment adviser, was additionally charged with violating certain recordkeeping provisions and with failing to reasonably supervise with a view to preventing and detecting those violations.

In addition to the significant financial penalties, each of the firms were ordered to cease and desist from future violations of the relevant recordkeeping provisions and was censured. The SEC says the firms also agreed to retain independent 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 Wells Fargo Bank NA, Wells Fargo Securities, LLC, BNP Paribas Securities Corp., BNP Paribas S.A., SG Americas Securities, LLC, Société Générale S.A., Bank of Montreal, and Wedbush Securities Inc., for related conduct.

“Compliance with the books and records requirements of the federal securities laws is essential to investor protection and well-functioning markets. To date, the Commission has brought 30 enforcement actions and ordered over $1.5 billion in penalties to drive this foundational message home. And while some broker-dealers and investment advisers have heeded this message, self-reported violations, or improved internal policies and procedures, today’s actions remind us that many still have not,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “So here are three takeaways for those firms who haven’t yet done so: self-report, cooperate and remediate. If you adopt that playbook, you’ll have a better outcome than if you wait for us to come calling.”

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