Reed Smith Client Alerts

On September 27, 2022, the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) announced charges against over a dozen firms registered as broker-dealers and/or investment advisers, and firms regulated by the CFTC, for their longstanding failures to maintain and preserve electronic communications in violation of federal laws. The SEC action targeted firms with total fines in excess of $1.1 billion, while the CFTC action targeted firms with total fines exceeding $710 million. The charges come less than a year after another broker-dealer subsidiary of a major U.S. financial institution agreed to pay $200 million to the regulators in December of 2021 for similar violations, bringing the total fines in the overall investigations to more than $2 billion.
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As part of their widespread investigations, the regulators found that the firms’ employees used personal devices to communicate over unauthorized messaging platforms regarding the firms’ businesses, and that the firms failed to maintain or preserve the majority of those communications in violation of Rule 17a-4(b)(4) of the Securities Exchange Act of 1934, Rule 204-2(a)(7) of the Investment Advisers Act of 1940, Sections 4(g), 4s(f)(1)(C) and 4s(g)(1) and (3) of the Commodity Exchange Act, and several CFTC Regulations. The regulators also found that the firms failed to adequately enforce policies and procedures that prohibit such communications and that they failed to reasonably supervise employees within the meaning of Section 15(b)(4)(E) of the Exchange Act, Section 203(e)(6) of the Advisers Act, and CFTC Regulation 166.3.

The regulators noted that on several occasions, senior executives and supervisory personnel responsible for ensuring compliance with the firms’ policies and procedures were themselves engaging in the use of unauthorized methods of communication in violation of federal laws. In some instances, senior executives even directed employees to use the unauthorized messaging platforms and to delete their messages.