Good morning.
CFOs know that if a company doesn’t comply with U.S. Securities and Exchange Commission regulations, it can be pricey. But employees, including senior executives, at some firms have been breaking the rules with text messages or WhatsApp chats and not keeping record of conversations—and it’s costing millions.
The SEC is making investor protection a priority. And it's especially cracking down on financial firms to stay compliant with transparent and accurate records. If employees are using texts or other apps for business dealings, there's a good possibility the conversation can be deleted. If there is improper conduct, it's really hard to suss out what happened if employees are only keeping partial official records.
The agency announced on Tuesday that 11 firms, including Wells Fargo and BNP Paribas, were fined for record-keeping failures due to “pervasive and longstanding ‘off-channel’ communications,” and they were collectively fined $289 million. An investigation found that from at least 2019, their employees often communicated company business using messaging platforms on their personal devices, like Apple's iMessage, WhatsApp, and Signal. And it was employees on various levels, including supervisors and senior executives.
The actions “undermine our ability to exercise effective regulatory oversight, often at the expense of investors,” Sanjay Wadhwa, deputy director of enforcement, said in a statement.
Wells Fargo was fined $125 million for three of its divisions—Securities LLC, Clearing Services LLC, and Financial Network LLC. The SEC’s paperwork filed on Wells Fargo states that the failure was “firm-wide, and involved personnel at all levels of authority.” During the company’s Q2 2023 earnings call last month, CFO Mike Santomassimo reminded investors that “we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses.”
Meanwhile, BNP Paribas Securities Corp. and SG Americas Securities, LLC have each agreed to pay penalties of $35 million; BMO Capital Markets Corp. and Mizuho Securities USA LLC will each pay $25 million; Houlihan Lokey Capital, Inc. will pay $15 million; Moelis & Company LLC and Wedbush Securities Inc. will each pay $10 million; and SMBC Nikko Securities America, Inc. will pay a $9 million penalty.
But these firms aren’t the first to be fined by the SEC for noncompliance in this area. "To date, the Commission has brought 30 enforcement actions and ordered over $1.5 billion in penalties to drive this foundational message home," Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said in a statement. Although some broker-dealers and investment advisers have listened to the SEC's message and have self-reported violations, or improved policies and procedures, "today’s actions remind us that many still have not,” Grewal said.
In addition to payments, each of the firms was ordered to “cease and desist” from future violations in record keeping. They must also retain independent compliance consultants to conduct comprehensive reviews of their policies and procedures. These consultants are expected to hold firms accountable for addressing noncompliant behavior of employees when it comes to electronic communications found on personal devices.
However, there are more fines for Wells Fargo and BNP Paribas. In separate charges, the Commodity Futures Trading Commission also announced on Tuesday they had reached settlement with four financial institutions—Wells Fargo ($75 million), BNP Paribas ($75 million), Société Générale S.A.,($75 million) and the Bank of Montreal ($35 million)—for failing to maintain, preserve, or produce records under the agency’s record-keeping requirements.
Grewal offered three takeaways for firms who may find themselves in violation of electronic communication violations: “self-report, cooperate and remediate,” he said in the announcement. “If you adopt that playbook, you’ll have a better outcome than if you wait for us to come calling,” Grewal said.
CFOs are increasingly tasked with taking a central role in regulatory reporting. And with the regulatory stakes becoming higher, mitigating risk around noncompliance will be forefront for finance chiefs.
Sheryl Estrada
sheryl.estrada@fortune.com
