On May 11, 2023, the SEC charged HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc. for their employees’ longstanding and widespread failures to preserve and maintain electronic communications. To settle the charges, HSBC and Scotia admitted that their conduct violated recordkeeping provisions of the federal securities laws and agreed to pay penalties of $15 million and $7.5 million, respectively.
Off-Channel Communications at HSBC Securities and Scotia Capital
The SEC’s investigation of HSBC Securities and Scotia Capital, both registered broker-dealers, found that both firms had a pervasive and long-standing practice of off-channel communications. The firms admitted that their employees communicated about securities business matters on their personal devices, using messaging platforms such as WhatsApp. Neither firm maintained or preserved the vast majority of these communications, in violation of the federal securities laws.
The SEC’s Orders
The failings of HSBC Securities and Scotia Capital involved employees at multiple levels of authority, including supervisors and senior executives. Both firms cooperated with the SEC’s investigation by self-reporting the recordkeeping failures after gathering communications from the personal devices of a sample of their personnel.
The SEC charged both firms with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and failing to reasonably supervise to prevent and detect those violations. Along with the financial penalties, each firm was censured and ordered to cease and desist from committing violations of the relevant recordkeeping provisions.
Compliance Consultants and Settlements
HSBC Securities and Scotia Capital also agreed to retain compliance consultants to conduct comprehensive reviews of their policies and procedures related to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures.
Separately, the Commodity Futures Trading Commission announced settlements with the firms for related conduct.
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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.