Dive Brief:
- HSBC Securities must pay $15 million and adhere to a detailed compliance program for allowing executives and employees to use WhatsApp and other off-channel communications in violation of federal securities recordkeeping rules.
- Scotia Capital must pay $7.5 million for the same reason. The Commodity Futures Trading Commission separately fined Scotia and its parent, The Bank of Nova Scotia, $15 million for the off-channel communications.
- The actions should “remind firms of the importance of following SEC recordkeeping requirements,” Gurbir Grewal, director of enforcement at the Securities and Exchange Commission, said in a statement.
Dive Insight:
Both HSBC and Scotia Capital reduced their fines by self-reporting and self-remediating their recordkeeping violations, Grewal said.
“The reduced penalties in these cases reflect their efforts and cooperation,” he said. “We encourage other firms to take note and likewise self-report.”
Both companies initiated a review after the SEC announced it was commencing an initiative to see if broker-dealers were using apps on personal devices for business-related communications.
Both the SEC and the Department of Justice have made company use of messaging apps a focus of enforcement efforts because of the difficulty they pose to agencies trying to investigate compliance issues.
The SEC’s Rule 17a-4 requires the preservation of communications in an easily accessible place.
At HSBC Securities, employees and executives sent and received hundreds of messages between January 2018 and September 2021, according to the order.
One managing director, the agency said, exchanged hundreds of off-channel business-related messages with colleagues, investment banking clients and personnel at other financial services firms.
At Scotia Capital, employees sent thousands of messages between at least January 2020 through December 2021, the order said.
As part of their review, Scotia executives looked at a sampling of 37 employees and found that nearly every one had used some off-channel communications.
“A significant number of managing directors, directors, traders and investment bankers participated in off-channel communications,” the agency said.
In addition to the fines, the companies face a tightly prescribed recordkeeping and reporting compliance program, including having a consultant do an assessment after a year.
The action is the latest by the SEC and DOJ to curb the use of the apps. In January, after being hit with big fines, Morgan Stanley and JPMorgan Chase initiated employee pay clawbacks to help them recoup the money they paid to the SEC.
In March, DOJ issued a warning to companies about policing their use of the apps.
“If a company has not produced communications from these third-party messaging applications, our prosecutors will not accept that at face value,” Assistant Attorney General Kennth Polite, Jr., said at a conference.
