SEC Fines Financial Firms $81M for Off-Channel Communication Breaches

On Friday, the Securities and Exchange Commission (SEC) disclosed that it had imposed fines totaling $81 million on 16 financial firms, including subsidiaries of U.S. Bank, KeyBank, and Huntington Bank, reports Banking Dive. This enforcement action is part of the SEC's ongoing investigation into off-channel communications and record-keeping practices. These 16 firms are affiliated with eight parent companies and cover a range of broker-dealers and investment advisers. The penalties vary, with Northwest Mutual facing the highest at $16.5 million and Huntington receiving the lowest at $1.5 million. The SEC highlighted that Huntington's penalty was mitigated by the bank self-reporting the violation and cooperating with the investigation.

KeyBank's investment services unit and capital markets unit will jointly pay $10 million, while U.S. Bank's investments unit will pay $8 million. Both KeyBank and U.S. Bank had previously alerted investors in November about their involvement in "settlement negotiations" or "resolution discussions" related to the so-called WhatsApp probes.

The SEC revealed that the affected broker-dealers acknowledged that their employees had engaged in personal text messages about company business since at least 2019 or 2020. On the other hand, the investment advisers admitted to their employees sending and receiving off-channel communications related to recommendations and advice. In response to these violations, the SEC has issued cease-and-desist orders to each firm, preventing future similar record-keeping breaches. Additionally, the firms have agreed to enlist independent compliance consultants to review their record-keeping policies.

Comparatively, the penalties in this latest round of WhatsApp investigations are lower than those in previous cases involving larger banks. Notable fines include Guggenheim ($15 million), Oppenheimer ($12 million), Cambridge ($10 million), and Lincoln ($8.5 million). In August of the previous year, Wells Fargo faced a $200 million fine in the last major WhatsApp-related enforcement action.

The SEC's crackdown on off-channel communications commenced in December 2021 with JPMorgan Chase agreeing to a $200 million settlement. Subsequent penalties were imposed in September 2022, involving 11 Wall Street banks and brokerages, and later in November with Fifth Third Bank agreeing to an $8 million penalty. It is noteworthy that the Commodity Futures Trading Commission did not announce penalties alongside the SEC in this latest round.

Gurbir S. Grewal, director of the SEC's Division of Enforcement, emphasized that these actions against the 16 firms are part of ongoing efforts to ensure compliance with record-keeping requirements, crucial for monitoring and enforcing adherence to federal securities laws.