SEC and CFTC issue penalties for non-compliance with approved communication channel requirements
Recent developments involving compliance breaches and off-channel communications have brought the topic into the spotlight. Two significant cases, one by the Commodity Futures Trading Commission (CFTC) and another by the Securities and Exchange Commission (SEC), underscore the importance of adhering to regulatory standards in this area. In this blog post, we dive into the details and implications of these recent enforcement cases and how firms can leverage training and technology to reduce non-compliance risk.
CFTC’s Message: Unapproved Communication Methods Lead to Penalties
The CFTC has taken a firm stance against financial institutions’ failure to maintain proper records and diligently supervise their businesses. In its latest enforcement action, the CFTC has ordered four major financial institutions to collectively pay $260 million in penalties for their recordkeeping and supervision failures linked to the widespread use of unapproved communication methods. These four institutions are part of a larger group of 11 firms which the SEC has simultaneously brought charges against. The settling bank-affiliated swap dealers and futures commission merchants (FCMs) are as follows:
- First-tier international banking group: $75 million
- One of Europe’s leading financial services groups: $75 million
- A Top-5 bank in the United States: $75 million
- A Top-10 North American bank: $35 million
The CFTC’s Director of Enforcement, Ian McGinley, emphasizes that the core regulatory obligations of recordkeeping and supervision must not be disregarded. “The Commission’s message could not be more clear—recordkeeping and supervision requirements are fundamental, and registrants that fail to comply with these core regulatory obligations do so at their own peril,” said McGinley. The penalties imposed on these institutions reflect the severity of their violations, not only from a financial perspective but also associated with firm reputation, emphasizing the significance of adhering to regulatory standards.
SEC’s Crackdown on Recordkeeping Failures: Wall Street Firms Penalized
In a parallel development, the SEC has brought charges against 11 firms, primarily broker-dealers and investment advisers, for widespread and longstanding failures in maintaining and preserving electronic communications. These firms admitted their violations and agreed to pay a combined total of $289 million in penalties. The violations involve the improper use of personal devices and messaging platforms such as iMessage, WhatsApp, and Signal for business communication.
The SEC’s investigation revealed that these firms had failed to maintain and preserve essential off-channel communications, undermining investor protection and regulatory oversight. These firms, which include several well-known financial institutions, are now required not only to pay substantial penalties but also to initiate improvements in compliance policies and procedures.
Implications and Takeaways
These recent cases highlight a crucial message for financial institutions: Compliance with recordkeeping and supervision of off-channel communication requirements is non-negotiable. Regulatory bodies are actively monitoring and enforcing these standards to ensure fair and transparent financial markets. The penalties imposed on the implicated firms send a clear signal that non-compliance can lead to significant financial consequences and reputational damage.
For financial institutions, there are three key takeaways:
- Strict Adherence to Regulatory Standards: The core obligations of maintaining records and diligently supervising business operations cannot be overlooked. Institutions must proactively ensure that their employees and associates adhere to approved communication methods and comply with all relevant regulations.
- Investment in Compliance: Firms should allocate resources to ensure robust compliance policies, procedures, and training programs. Investment in compliance is an investment in long-term sustainability and credibility.
- Collaboration with Regulatory Bodies: Self-reporting, cooperation, and remediation are critical means to mitigate non-compliance for institutions that discover violations. Collaboration with regulatory bodies can lead to better outcomes compared to waiting for enforcement actions.
In an era of rapidly advancing communication methods and evolving financial landscapes, regulatory compliance remains paramount. The recent actions by the CFTC and SEC serve as a stark reminder that financial institutions must operate within the bounds of regulatory requirements to maintain the integrity of global markets.
How RegEd Can Help
RegEd is the leading provider of Compliance Education, Product Training and Annual Compliance Programs to the financial services industry. Given the regulatory focus on off-channel violations in financial services, RegEd recently released a new off-channel communications course titled “Off-Channel Communications, Personal Devices, Social Networking, Texting & Blogs.” This course is offered as part of RegEd’s industry-leading education and training platform and is designed to update the communications landscape for firms that allow their representatives to use personal devices and social networking sites and blogs for business. In addition, RegEd’s Enterprise Policies & Procedures Management solution enables comprehensive, end-to-end administration and oversight of all elements of the firm’s policies and procedures, reducing a firm’s risk of non-compliance. To learn more, schedule a complimentary consultation with one of our RegEd solution experts.
RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.
Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.
Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please visit www.reged.com.