Trader Talk

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Wall Street has a texting problem and the SEC is not happy.

Last night the SEC announced charges against 15 broker-dealers and an investment adviser for “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.”

The firms, including Goldman Sachs, Morgan Stanley, Barclays and UBS, agreed to pay combined penalties of more than $1.1 billion. Separately, the Commodity Futures Trading Commission also announced $710 million in penalties. 

That’s a lot of money, even for Wall Street. What’s the issue? The SEC “uncovered pervasive off-channel communications.”  That means that many broker-dealers were communicating with each other either on their personal cell phones directly, or using personal email, or using messaging apps like Telegram or WhatsApp that are hard to detect. “These personnel included senior and junior investment bankers and debt and equity traders,” the SEC said. 

According to the SEC, from January 2018 through September 2021, “the firms’ employees routinely communicated about business matters using text messaging applications on their personal devices. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws.” 

It’s not hard to see why this is a problem. It makes it difficult for the firms to maintain record-keeping of what everyone is doing, as they are required to do by law. 

“If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a statement. 

“Since the 1930s, such recordkeeping has been vital to preserve market integrity,” SEC Chair Gary Gensler said in a statement. “As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.” 

“This is a message being sent by the SEC,” Amy Lynch, President of FrontLine Compliance, told me. 

“Off channel communications have been a pervasive problem in the industry for many years. It’s the elephant in the room that no one wants to see.  There are ways to capture and monitor texts, chats, etc. but many firms choose not to or may not be aware that automated systems exist to capture these communications. The big banks typically build their own systems as opposed to buying off the shelf systems. I suspect they may now be building them out due this enforcement action.” 

This is one of several enforcement actions the SEC has brought in the last several weeks. That’s not surprising: September is the end of the fiscal year, so the SEC typically tries to get all the fines it can in place before the end of the month.

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