Wall Street’s Recordkeeping Reckoning: SEC Charges 11 Broker-Dealer Firms

The Securities and Exchange Commission (SEC) has made a significant move by charging 11 Wall Street firms, including 10 broker-dealers and one dually registered broker-dealer and investment adviser, with widespread and prolonged failures related to the recordkeeping of electronic communications. These firms have acknowledged their wrongdoing and will pay a total of $289 million in penalties. Let’s delve into the details of this development.

Financial Giants Face Penalties

The SEC’s actions are a response to extensive recordkeeping deficiencies by these firms and their employees, which have persisted over an extended period. The firms have admitted to violating the recordkeeping provisions of federal securities laws, leading to their agreement to pay substantial penalties and an undertaking to enhance their compliance policies and procedures.

Here is a breakdown of the penalties imposed:

  • Wells Fargo Securities, LLC, Wells Fargo Clearing Services, LLC, and Wells Fargo Advisors Financial Network, LLC: $125 million
  • BNP Paribas Securities Corp. and SG Americas Securities, LLC: $35 million each
  • BMO Capital Markets Corp. and Mizuho Securities USA LLC: $25 million each
  • Houlihan Lokey Capital, Inc.: $15 million
  • Moelis & Company LLC and Wedbush Securities Inc.: $10 million each
  • SMBC Nikko Securities America, Inc.: $9 million

The SEC’s Message: Compliance is Non-Negotiable

The SEC’s Director of Enforcement, Gurbir S. Grewal, emphasizes the importance of compliance with books and records requirements as a fundamental aspect of investor protection and well-functioning markets. He underscores the need for broker-dealers and investment advisers to take immediate action by self-reporting, cooperating, and remediating violations to achieve more favorable outcomes.

The Deputy Director of Enforcement, Sanjay Wadhwa, further explains that these actions are part of a sweeping effort to ensure that regulated entities meet their recordkeeping obligations. Recordkeeping failures, as witnessed in this case, can undermine the SEC’s ability to oversee and enforce compliance with federal securities laws, ultimately harming investors.

A Deep Dive into the Off-Channel Communications Issue

The SEC’s investigation unearthed pervasive and long-standing off-channel communications at all 11 firms. These communications are carried out through personal devices and various messaging platforms like iMessage, WhatsApp, and Signal, centered around the firms’ business matters. Shockingly, the firms failed to maintain or preserve the majority of these off-channel communications, a clear breach of federal securities laws.

It’s worth noting that these lapses in recordkeeping may have hindered the SEC’s access to essential off-channel communications in various investigations. Importantly, these failures extended across all levels of authority within the organizations, including supervisors and senior executives.

Charges and Consequences for Each Broker-Dealer

Each of the broker-dealers has been charged with violating specific recordkeeping provisions of the Securities Exchange Act of 1934. Additionally, they have been accused of failing to reasonably supervise to prevent and detect these violations. Wedbush Securities Inc., a dually registered broker-dealer and investment adviser, faces additional charges related to the Investment Advisers Act of 1940.

In addition to the substantial financial penalties, the firms have received cease and desist orders against future violations of the relevant recordkeeping provisions and have been censured. They are also required to retain independent compliance consultants. These consultants will comprehensively review their policies and procedures regarding the retention of electronic communications found on personal devices. Furthermore, they will evaluate the firms’ frameworks for addressing non-compliance by their employees with these policies and procedures.

Parallel Actions by the Commodity Futures Trading Commission

Notably, the Commodity Futures Trading Commission (CFTC) has also announced settlements related to this conduct with several of the firms. This reflects a coordinated effort to address these recordkeeping issues.

The SEC’s Ongoing Vigilance

The SEC’s commitment to ensuring compliance with recordkeeping requirements remains resolute. While some firms have heeded the call by self-reporting violations and improving internal processes, these actions serve as a reminder that many have not. The message is clear: proactive compliance is key to avoiding regulatory scrutiny.