“Unfortunately, in the past we’ve seen violations in the financial markets that were committed using unofficial communications channels.”
— Gary Gensler, Chairperson, U.S. Securities and Exchange Commission
In the financial sector, securities firms must have communication surveillance and archival systems to comply with industry regulations. And while these systems are in place, we continue to see unauthorized apps and personal phones being used to conduct business. The U.S. Securities and Exchange Commission (SEC) is cracking down and doling out nearly $2 billion in fines to several of the world’s largest banks. As a result, compliance teams are also getting more serious within their walls about ending this illegal practice. This week, we examine the extremely high cost of using unapproved messaging channels to conduct financial business.
U.S. Pries Into Over 100 Trader and Banker Phones in Texting Probe
Earlier this year, Wall Street banks were forced to embark on a systematic search through over 100 personal mobile phones carried by top traders and dealmakers. This is the largest-ever probe into clandestine messaging on digital platforms such as WhatsApp. Under industry rules, securities firms are required to set up surveillance systems and archive written communications. Yet workers across the industry embraced messaging apps in their personal lives, and many began using them to chat, potentially splicing jokes, gripes, gossip, and tales of weekend adventures with messages about trades and deals. Moreover, texting became common when the pandemic forced legions to work from home, out of bosses’ sight. The probe aimed to gauge how pervasively Wall Street professionals use unauthorized messaging platforms to chat with each other or clients as regulators decide which firms to punish—and how hard—for failing to preserve business-related messages sent via unapproved platforms.
Wall Street to Pay $1.8 Billion in Fines Over Traders’ Use of Banned Messaging Apps
Eleven of the world’s largest banks and brokerages will collectively pay $1.8 billion in fines to resolve regulatory investigations over their employees’ use of messaging applications that broke record-keeping rules. The SEC alleged widespread failures by the firms and their employees to maintain and preserve electronic communications. The SEC said that the companies have admitted to the facts outlined in the SEC orders, acknowledged that their actions violated recordkeeping provisions of federal securities laws, agreed to pay penalties, and have started improving their compliance policies and procedures.
Wall Street’s $1BN Messaging ‘Nightmare’
The investigation into JPMorgan Chase that became public last year found that JPMorgan failed to track more than 21,000 texts and emails sent and received on personal phones or through unapproved apps resulting in a $200 million penalty to resolve the matter. This was only the beginning of the problem. Many banking clients have grown to prefer WhatsApp as an easier and more rapid communication method. Compliance will not sign off on WhatsApp or WeChat usage without a formal way of policing messages. Still, some bankers decided to start using the apps anyway despite lacking sufficiently robust software to monitor communications. Using personal phones to do business has also exposed rifts between bankers and their counterparts in risk and compliance. Now, a group of other banks has earmarked similar amounts to JPMorgan to cover potential settlements with U.S. regulators, and as fines mount, banks and bankers have to find new ways of working.
What’s Up With WhatsApp and Text Messaging? SEC and FINRA Weigh In
The SEC requires broker-dealers to maintain originals of all communications received and copies of all communications sent by the broker-dealer for three years. The SEC and FINRA have focused on the use of unapproved messaging channels ranging from WhatsApp to simple texting on a personal device, imposing fines and suspensions for misuse. The SEC and FINRA will investigate firms for compliance. Firms must consider harmonizing modern communication practices with record-keeping requirements.
