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Regulators Impose $549 Million in Fines on 10 Investment Firms for Failure to Preserve Audit Trail

As storied whistleblower lawyer Jason T. Brown from Brown, LLC has commented on many times, the SEC, CFTC and other regulatory agencies are looking to make examples of companies that keep back channel communications and fail to preserve those communications in a manner that is sufficient to audit. Under the SEC whistleblower program and CFTC whistleblower program, individuals who have blown the whistle with an SEC whistleblower attorney are able to obtain up to 30% of what the government recovers as an SEC whistleblower reward as well as stay anonymous,  In a recent crackdown on unauthorized off-channel communications, U.S. regulators have imposed fines totaling $549 million on ten prominent investment firms, underscoring their commitment to enforcing adherence to communication protocols. The penalties were levied against nine Wall Street entities, including well-known names such as Wells Fargo, BNP Paribas, and Société Générale, for their employees’ use of personal messaging applications to discuss crucial business matters such as deals and trades.

This regulatory action is the latest development in an extensive two-year enforcement investigation aimed at curtailing the misuse of off-channel communication methods in the financial sector. These methods, including text messages and applications like WhatsApp, which have been identified as a breach of industry regulations mandating the retention of specific work-related communications.

Collectively, the fined firms, which encompass Wells Fargo, BNP Paribas, SocGen, Bank of Montreal, Wedbush Securities, Moelis & Company, Houlihan Lokey, Mizuho, and SMBC Nikko Securities, have agreed to disburse $289 million to the U.S. Securities and Exchange Commission (SEC) as part of the settlement. Additionally, Wells Fargo, BNP Paribas, SocGen, Bank of Montreal, and Wedbush will remit an additional $260 million to the Commodity Futures Trading Commission (CFTC) in connection with similar violations.

The investigation revealed that since 2019, employees across these firms frequently engaged in communications using personal devices and platforms like iMessage, WhatsApp, and Signal, flagrantly disregarding record-keeping regulations. This transgression was described by the SEC as a “pervasive and longstanding” violation.

This enforcement effort, initiated by the SEC and CFTC in late 2021, has led to a series of fines targeting broker-dealers over lapses in record-keeping compliance. Prominent financial institutions such as JPMorgan Chase, Barclays, and Bank of America have already incurred fines exceeding $2 billion as a result of related violations.

Observers suggest that these substantial fines underscore the regulators’ intention to convey a strong message to Wall Street, indicating the seriousness of non-compliance. According to Christine Lombardo, a partner at Morgan Lewis & Bockius law firm, this issue presents a complex challenge for firms to navigate.

While conventional practice requires banks to archive employees’ email communications, ensuring consistent adherence to approved communication channels for impromptu or informal discussions has proven challenging. This predicament led regulators to expand their investigative scope to include investment advisers.

According to Mr. Brown, “There’s many more cases to follow as financial industries don’t want these audit trails and instead use technology to try to frustrate the ability to have their communications regarding customers disappear.  I predict over the next several years there will be several hundred million dollars more of these enforcement actions and millions going out as whistleblower awards to individuals who have the opportunity to expose the practice and stay anonymous with an SEC whistleblower law firm.”