On September 27, 2022, the Commodity Futures Trading Commission announced that it filed and settled charges against registered swap dealer (SD) and futures commission merchant (FCM) affiliates of 11 financial institutions (registered entities) in connection with those entities’ employees conducting business (such as discussing firm business or business transactions) over unapproved modes of communication (such as personal text message and certain instant messaging services). Employees in senior management roles were involved in such communications as well. Civil monetary penalties cumulatively amounted to approximately $710 million for violating the entities’ internal compliance policies and the CFTC’s recordkeeping and diligent supervision requirements. Because firm business was conducted using unapproved communication platforms over extended timeframes (e.g., years), the firms were generally not able to maintain, preserve and promptly provide these business records to the CFTC when requested, in violation of CFTC recordkeeping requirements.
As mentioned above, the registered entities also failed to ensure that their employees complied with internal communications policies and procedures which led to widespread failures to diligently supervise the business, in violation of CFTC supervision requirements. According to the CFTC, each registered entity acknowledged their awareness of the widespread and longstanding use of these unapproved methods by their employees. The CFTC further reported that, in certain instances, even supervisory compliance personnel were found to have violated their own firm’s policy and used non-approved communication methods to engage in firm business.
On the same day, the Securities and Exchange Commission announced a separate but related civil action that was filed against 16 Wall Street firms – 15 broker-dealers and 1 affiliated investment adviser – in connection with widespread and longstanding recordkeeping deficiencies in connection with the pervasive use of off-channel communications by firm personnel. Many of the firms appeared to be affiliated with the registered entities that were subjects of the CFTC orders. The SEC reports that the firms cooperated with its investigation which ultimately revealed that, between January 2018 and September 2021, senior and junior investment bankers and debt and equity traders regularly engaged in this practice. Following the investigation, the 15 broker-dealer firms were charged with violating the recordkeeping provisions of the Securities Exchange Act of 1934 and failing to reasonably supervise their employees in order to detect and prevent the violations. The one investment adviser was charged with violating certain recordkeeping provisions of the Investment Advisers of 1940 and failing to adequately supervise employees. In their respective orders, all of the firms admitted the facts set forth by the SEC and acknowledged that their conduct violated federal securities laws.
The firms agreed to pay combined penalties to the SEC of more than $1.1 billion. In addition, each firm was censured by the SEC and ordered to cease and desist from future violations of the relevant recordkeeping provisions. The firms also agreed to retain compliance consultants to conduct a comprehensive review of their respective compliance frameworks; the policies, procedures and penalties associated with the use of personal devices, and the retention of electronic communications stored on them.