Dive Brief:
- Morgan Stanley and JPMorgan Chase are making some of their executives and lower-level employees return a portion of their pay for using messaging apps like WhatsApp and Signal that can be configured to delete communications.
- The two banks, along with other financial institutions like Bank of America and Citigroup, were hit with large fines last year by the Securities and Exchange Commission and Commodity Futures Trading Commission for allowing employees to use the apps without preserving their communications in violation of record-keeping rules under federal securities law.
- More than a dozen institutions paid $2 billion in fines to the two agencies, an amount that regulators said was set to be attention-getting to press the point that any communications related to the companies’ business must be preserved. “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,” SEC Chair Gary Gensler said last year, when the settlements were announced.
Dive Insight:
Morgan Stanley’s settlement with the SEC set it back $200 million, among the biggest of the fines. Dozens of employees at the bank used the apps for thousands of business communications, with the knowledge of supervisors, even though company executives were aware it violated federal law.
One managing director, for example, sent and received more than 1,400 so-called off-channel business-related messages to colleagues, investment banking clients and others, the SEC said in its complaint.
“Employees were advised that the use of unapproved electronic communications methods, including on their personal devices, were not permitted,” the complaint said.
Significant amounts
In the past, unless a violation involved fraud or alleged harm to investors, a fine would typically be something less than $1 million, according to a report in The Wall Street Journal. The median fine in 2020, for example, was $194,000. But the agencies are using aggressive penalties to make clear that off-channel communications must be off the table going forward.
“The fines are high to try to serve as a deterrent,” Mark Berman, a regulatory consultant at CompliGlobe, told the Journal.
By requiring employees to give some of their pay back, the two banks appear to be using the kind of company clawback policies that have exploded since passage of Sarbanes-Oxley in 2010.
An analysis that the SEC relied on when it proposed clawback rules last year found that 2,000 of the approximately 5,500 companies listed on a public U.S. exchange have clawback provisions in place, up from fewer than 1,000 in 2015.
More companies are expected to pass similar policies now that the SEC is requiring companies to recoup pay from employees when their compensation is based on company financial performance that later needs to be restated, even if the restatement stems from a mistake and not fraud, the previous standard.
Individual penalties
Morgan Stanley’s employee fines are between a few thousand dollars and more than $1 million based on how much they used the apps and other criteria, according to a report in The Financial Times. In some cases, the pay is being clawed back from previous bonuses and in other cases it will be deducted from future pay.
The amounts are based on a points system that looks at the number of messages sent, the employee’s seniority and whether they received prior warnings, the Times said.
JPMorgan Chase, which was also hit with a $200 million fine, has reduced the pay of several members of its top leadership team. Among them is Mary Erdoes, head of the bank’s asset and wealth management division, according to The Wall Street Journal. Other executives having to give money back are on the bank’s operating committee, which the Journal described as the group of executives closest to CEO Jamie Dimon.
