SEC & CFTC Crack Down on Widespread Record-Keeping & Communication Violations

In a sweeping regulatory action, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have imposed hefty fines totaling almost half a billion dollars ($477.75 million) on dozens of financial institutions for widespread record-keeping and supervision failures related to the use of unapproved communication methods.

The SEC announced charges against 26 firms, including major players such as Ameriprise Financial Services, Edward D. Jones & Co., LPL Financial, and Raymond James & Associates, for longstanding failures to maintain and preserve electronic communications. The firms admitted to violating recordkeeping provisions of federal securities laws and agreed to pay combined civil penalties of $392.75 million.

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, emphasized the importance of compliance with books and records requirements, stating, "As today's enforcement actions against more than two dozen firms reflect, we remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets."

Concurrently, the CFTC issued orders against several institutions, including The Toronto Dominion Bank (TD Bank), Cowen and Company, and Truist Bank, for similar violations. TD Bank was ordered to pay a total of $79 million in two separate actions – $75 million for recordkeeping and supervision failures related to unapproved communication methods, and an additional $4 million for supervision failures impacting its electronic communications surveillance system.

The CFTC's Director of Enforcement, Ian McGinley, highlighted the critical nature of communications surveillance, stating, "This order and the significant monetary penalty reflect that swap dealers must not only have robust systems to detect and prevent market abuse and other misconduct, they must also vigilantly oversee and monitor those systems to ensure they are working."

The investigations by both agencies uncovered pervasive use of unapproved communication methods, including personal text messages and social applications, by employees at various levels, including senior management. This practice violated the firms' internal policies and procedures and resulted in the failure to maintain and preserve required records.

Since December 2021, the CFTC has imposed a total of $1.202 billion in civil monetary penalties on 24 financial institutions for their use of unapproved communication methods, violating CFTC record-keeping and supervision requirements.

In a notable development, three firms – Truist Securities, Cetera Advisor Networks, and Hilltop Securities – received credit for self-reporting their violations to the SEC, resulting in significantly reduced penalties. This approach was praised by Grewal, who noted that it "demonstrat[es] once again the real benefits of proactive cooperation."

However, the enforcement actions have not been without controversy. CFTC Commissioner Caroline D. Pham issued a dissenting statement on the Cowen and Co. case, expressing concern about the lack of evidence specific to CFTC-registered Associated Persons in the administrative record. Pham stated, "I am unable to support an enforcement action that does not have any evidence that the alleged violations actually occurred."

Pham also raised concerns about the potential impact of these enforcement actions on market participation, noting that two of the three introducing brokers charged have since de-registered with the CFTC. She cautioned, "The CFTC should be promoting greater access to markets—not limiting access."

As part of the settlements, the firms have agreed to cease and desist from future violations, pay the stipulated penalties, and implement improvements to their compliance policies and procedures. The actions serve as a stark reminder to financial institutions of the importance of maintaining proper recordkeeping practices and effectively supervising electronic communications.

These coordinated actions by the SEC and CFTC underscore the regulators' commitment to enforcing record-keeping and supervision requirements in the financial industry, even as communication technologies continue to evolve. The substantial penalties and widespread nature of the violations suggest that firms across the financial sector may need to reassess and strengthen their policies regarding electronic communications and record-keeping to avoid similar regulatory scrutiny in the future.

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