The SEC announced charges against 10 broker-dealer firms and one dually registered broker-dealer and investment adviser for a series of failures related to the maintenance and preservation of electronic communications. These failures have been widespread and longstanding, leading to severe consequences for the firms involved.
Admission of Violations and Penalties
The firms have acknowledged the veracity of the allegations in their respective SEC orders. These firms have openly admitted to breaching the recordkeeping provisions of the federal securities laws. As a result of these admissions, they have agreed to collectively pay penalties totaling $289 million. The penalties have been assigned as follows:
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 Importance of Recordkeeping
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that maintaining accurate records is vital for investor protection and the proper functioning of the markets. The SEC has taken strong actions in the past to enforce this principle, with over 30 enforcement actions resulting in penalties exceeding $1.5 billion. While some firms have responded to this call by improving their internal policies, today’s charges serve as a stark reminder that many firms still need to adopt a more proactive approach. Grewal advises firms to self-report, cooperate, and remediate to ensure better outcomes and avoid regulatory interventions.
Persistent Communication Failures
The SEC’s investigation has revealed that all 11 firms involved in this case had a consistent pattern of “off-channel” communications. Starting from at least 2019, employees across these firms used various messaging platforms, such as iMessage, WhatsApp, and Signal, on their personal devices to discuss business matters. The firms failed to maintain or preserve the majority of these off-channel communications, a violation of federal securities laws. This oversight had serious repercussions, potentially depriving the Commission of crucial information during various investigations. Notably, these failures extended across different levels of authority, implicating supervisors and senior executives.
Charges and Supervision
Each of the broker-dealer firms has been charged with violating specific recordkeeping provisions of the Securities Exchange Act of 1934. Additionally, they face charges of failing to adequately supervise to prevent and detect these violations. Wedbush Securities Inc., which operates as both a broker-dealer and investment adviser, has been charged with similar recordkeeping violations under the Investment Advisers Act of 1940.
Corrective Measures and Industry-wide Compliance
In addition to the substantial financial penalties, the SEC has ordered each firm to cease and desist from future violations of recordkeeping regulations. Furthermore, the firms have been censured for their actions. As a step toward rectifying their practices, each firm has agreed to engage independent compliance consultants. These consultants will conduct thorough reviews of the firms’ policies and procedures related to the retention of electronic communications on personal devices. The goal is to establish robust frameworks that address non-compliance by employees.
This case has a significant impact on all brokerage firms. It highlights the broader need for all broker-dealers and investment advisers to review their recordkeeping procedures in order to avoid costly investigations, fines and penalties. – Mark Astarita
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.