The SEC and CFTC crack down: Record-keeping fines soar beyond $2.5bn


Theta Lake recently provided a deeper look into the high level of fines that are being aimed at financial institutions. 

Regulatory bodies in the U.S. have once again demonstrated their intolerance for financial institutions failing to maintain proper electronic communication records.

The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have dealt a collective fine of $555m to 11 institutions, citing ‘widespread and longstanding failures’ to preserve electronic communications adequately.

The implicated firms did not contest the allegations, accepting their roles in violating record-keeping standards. The SEC’s penalties encompassed $289m for 11 firms that are already initiating requisite improvements to their compliance guidelines. Meanwhile, the CFTC handed out sanctions amounting to $266m to four firms, alongside a futures commission merchant, all for record-keeping and supervision violations. All sanctioned institutions have started the prescribed remedial actions.

This recent wave of penalties underscores a trend of increasing regulatory vigilance. Since December 2021, the CFTC has levied an astounding $1.091bn on 18 financial entities over the inappropriate use of communication methods that breach its standards. Concurrently, the SEC has undertaken 30 enforcement actions, resulting in penalties surpassing $1.5bn. Collectively, fines for off-channel communications exceed $2.5bn, solidifying the issue’s prominence in regulatory agendas.

The foundational issues that led to these enforcement actions are uniform across institutions. Many firms persistently allowed their employees, spanning various authority tiers, to employ unapproved communication avenues. This includes sending messages via personal devices on platforms like iMessage, WhatsApp, and Signal. These unendorsed communication methods were neither maintained nor preserved. Consequently, the institutions could not promptly furnish these records when regulatory bodies demanded them.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, sternly commented on the situation. He said, “Compliance with the books and records requirements of the federal securities laws is essential. Many firms have not heeded this message. Those who haven’t need to self-report, cooperate and remediate.”

The CFTC’s Commissioner Christy Goldsmith Romero and Director of Enforcement Ian McGinley expressed similar sentiments. Romero stated, “Wall Street must change its culture from compliance evasion to prioritising adherence to regulations.” McGinley further emphasised, “Record-keeping and supervision requirements are paramount. Non-compliant registrants act at their own peril.”

Given these explicit warnings, firms are urged to scrutinise their communication methods urgently. There is a silver lining, however. Firms that proactively review and rectify their off-channel communications can mitigate potential penalties. In May 2023, for instance, some entities benefited from reduced fines due to their self-reporting and swift remediation initiatives.

Finally, the challenge surrounding unregulated communication platforms persists. Firms must recalibrate, enhancing approved channels to boost productivity and reduce off-channel reliance. To reiterate, a thorough internal audit is imperative. Should off-channel communications emerge, it’s crucial to report promptly to the respective regulatory agency and begin immediate remediation.

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