The Commodity Futures Trading Commission (CFTC) recently issued two simultaneous orders, filing and settling charges against U.S. Bank, N.A., a swap dealer, and Oppenheimer & Co., Inc., an introducing broker. These charges were due to their failure to maintain and preserve records as required under CFTC recordkeeping regulations, and their lack of diligent supervision over matters pertaining to their businesses as CFTC registrants. U.S. Bank incurred a $6 million civil monetary penalty, while Oppenheimer faced a $1 million penalty.
The CFTC’s investigation revealed that since at least 2019, both U.S. Bank and Oppenheimer neglected to prevent employees, including senior staff, from utilizing unauthorized communication methods, such as personal text messages. These communications were pertinent to the firms’ CFTC-registered activities but were not consistently stored and preserved, hindering timely provision to the CFTC upon request. Additionally, the widespread use of unapproved communication methods violated internal policies that prohibited such practices. Moreover, supervisory personnel, responsible for upholding compliance, were found to have engaged in business-related communications through unauthorized channels, contravening firm policy.
Since December 2021, the CFTC has imposed $1.124 billion in civil penalties on 22 financial institutions for breaching CFTC recordkeeping and supervision regulations by employing unauthorized communication methods and problematic text message archiving
The U.S. Securities and Exchange Commission (SEC) also announced entry of orders filing and settling charges against an SEC-registered U.S. Bank affiliate and Oppenheimer and imposing civil monetary penalties for recordkeeping and supervision violations related to the use of unapproved communication methods.
Related Civil Actions
The Securities and Exchange Commission (SEC) additionally unveiled charges against five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for extensive and persistent lapses by both the firms and their personnel in preserving and maintaining electronic communications. Acknowledging the facts outlined in their individual SEC orders, the firms confessed to breaching recordkeeping regulations within the federal securities laws. They consented to settle these charges by collectively paying civil penalties exceeding $81 million, as detailed below. Furthermore, they have initiated measures to enhance their compliance policies and procedures, aiming to rectify these violations.
- Northwestern Mutual Investment Services LLC (NMIS), together with Northwestern Mutual Investment Management Co. LLC (NMIM) and Mason Street Advisors LLC (Mason Street) (collectively, Northwestern Mutual), agreed to pay a $16.5 million penalty;
- Guggenheim Securities LLC (Guggenheim Securities), together with Guggenheim Partners Investment Management LLC (GPIM) (collectively, Guggenheim), agreed to pay a $15 million penalty;
- Oppenheimer & Co. Inc. (Oppenheimer) agreed to pay a $12 million penalty;
- Cambridge Investment Research Inc. (CIR), together with Cambridge Investment Research Advisors Inc. (CIRA) (collectively, Cambridge), agreed to pay a $10 million penalty;
- Key Investment Services LLC (KIS), together with KeyBanc Capital Markets Inc. (KBCM) (collectively, Key), agreed to pay a $10 million penalty;
- Lincoln Financial Advisors Corporation, together with Lincoln Financial Securities Corporation (collectively, Lincoln), agreed to pay an $8.5 million penalty;
- S. Bancorp Investments Inc. (U.S. Bancorp) agreed to pay an $8 million penalty; and
- The Huntington Investment Company (HIC), together with Huntington Securities Inc. (HSI) and Capstone Capital Markets LLC (Capstone) (collectively, Huntington), which self-reported, agreed to pay a $1.25 million penalty.
“Today’s actions against these 16 firms result from our continuing efforts to ensure that all regulated entities comply with the recordkeeping requirements, which are essential to our ability to monitor and enforce compliance with the federal securities laws,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Once again, one of these orders is not like the others: Huntington’s penalty reflects its voluntary self-report and cooperation.”
The investigations conducted by the SEC revealed widespread and long-standing usage of unauthorized communication methods, referred to as off-channel communications, across all 16 firms. According to the SEC’s findings, broker-dealer firms acknowledged that since at least 2019 or 2020, their employees exchanged business-related information through personal text messages. Similarly, investment adviser firms admitted that their employees engaged in off-channel communications concerning recommendations or advice, without maintaining or preserving the majority of these exchanges, thus violating federal securities laws. This failure to uphold recordkeeping requirements likely hindered the SEC’s access to crucial off-channel communications during various investigations. These lapses implicated employees across different levels of authority, including supervisors and senior managers.
Guggenheim Securities, CIR, Huntington, Key, Lincoln, NMIS, Oppenheimer, and U.S. Bancorp were each charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to reasonably supervise with a view to preventing and detecting those violations. CIRA, GPIM, HIC, KIS, Lincoln, NMIM, and Mason Street were each charged with violating certain recordkeeping provisions of the Investment Advisers Act of 1940 and with failing to reasonably supervise with a view to preventing and detecting those violations.
Apart from facing substantial financial penalties, each firm received orders to halt and desist from future breaches of the pertinent mobile communication recordkeeping regulations and received censure. Furthermore, the firms committed to engaging independent communication compliance consultants to conduct thorough evaluations of their policies and procedures concerning the retention of electronic communications discovered on personal devices and the capture of mobile text. These consultants will also assess the frameworks in place for addressing employee non-compliance with these policies and procedures, among other responsibilities.
Self-Reporting Key Factor in Reducing SEC Off-Channel Communication Fines
In recent comments, Sanjay Wadhwa, deputy director of the SEC’s enforcement division, explained that financial firms may significantly reduce the fines they face for recordkeeping rule violations by directly disclosing them to the U.S. Securities and Exchange Commission (SEC), the process of fine assessment in such cases, addressing criticism from the defense bar about arbitrary number selection by the agency.
In recent years, the SEC has intensified its enforcement against Wall Street firms for using prohibited messaging apps for business communication. Regulators argue that such app usage undermines their ability to access necessary records for oversight.
Since December 2021, the SEC has filed charges against 60 firms and levied fines exceeding $1.7 billion for failure to maintain electronic communication records. This enforcement initiative has expanded to include investment advisers and credit-rating firms, with a recent fine of $81 million imposed on a group of brokerages in February.
Additionally, investment adviser Senvest Management agreed to pay $6.5 million after acknowledging that its employees utilized personal texts and forbidden messaging apps for discussing company matters between 2019 and 2021. A company spokeswoman declined to provide further comment.
Wadhwa emphasized that voluntary self-reporting of violations to the agency is the factor most likely to significantly reduce the recommended penalty for a firm. However, even if a firm does not self-report, it can still receive credit based on its cooperation during the investigation.
Additional SEC Fines
Separately, A $50 million accrual tied to an investigation by the SEC into the utilization of off-channel communications by Ameriprise Financial employees for business purposes was revealed by the company. This disclosure was made in their latest annual report released on February 22. Ameriprise stated that it had reached a preliminary agreement with SEC staff regarding the issue.
The accrual was recorded in 2023 by Ameriprise after it responded to SEC inquiries concerning the preservation of specific business-related communications transmitted via unauthorized electronic messaging platforms. The SEC has emphasized that financial firms can mitigate penalties for violations related to off-channel communications by voluntarily self-disclosing and addressing the issues.
FINRA imposes $500K Fine on Florida Brokerage Firm for Failure to Retain Business-Related Texts
A Florida-based brokerage company has agreed to pay $500,000 in settlement charges brought forth by the Financial Industry Regulatory Authority (FINRA) for its failure to retain over 10,000 business-related text messages spanning a decade.
Dawson James Securities, headquartered in Boca Raton, Florida, with three branch offices and approximately 35 registered representatives, is the subject of this settlement, as per FINRA. The firm’s main focus lies in the sales of private and public securities offerings, as outlined in FINRA’s settlement letter released on Friday.
The settlement also implicates CEO Robert Dawson Keyser Jr., who established the firm in 2002. Keyser, with a career spanning back to 1984, has been associated with over a dozen firms across New York and Florida, according to his BrokerCheck profile.
Dawson James Securities implemented a ban on business-related texting for its employees starting from August 2011. Although this restriction was lifted temporarily in December 2017, it was reinstated in January 2021. However, the firm lacked a system for the preservation or review of any business-related text messages, as highlighted by FINRA.
Subsequently, the firm failed to capture and store over 10,900 business-related text messages sent or received by at least 27 employees. These messages encompassed discussions related to the firm’s net capital computations, customer complaints, and client recommendations.
“The firm’s management knew that associated persons used text messaging for business-related communications, and during the period when the firm prohibited using text messaging for business purposes, Keyser Jr. used his firm-issued mobile phone to send and receive approximately 4,400 business-related text messages,” the settlement noted.
The settlement arose following a review conducted by FINRA examiners of Dawson James. Alongside the cited texting deficiencies, regulators also identified shortcomings in the firm’s supervisory systems concerning due diligence of private placement offerings, as outlined in the settlement.
Specifically, Dawson James’ procedures failed to address conflicts arising when its investment bankers were involved in due diligence on offerings by issuers with whom they had affiliations.
While Dawson James neither admitted nor denied the findings in the settlement, the firm consented to a $500,000 fine, a censure, and the engagement of a third-party compliance consultant to assess their protocols regarding the retention and review of business-related texts, among other matters. Additionally, Keyser Jr. agreed to a one-month suspension and a $10,000 fine.
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