US regulators continue to focus on incomplete data being submitted to surveillance platforms
In October last year we communicated that US regulators had imposed substantial fines on several large financial institutions for unauthorised communications on WhatsApp, iMessage and Signal and for poor record keeping and supervisory failures.
We also set out our thoughts regarding market abuse risk assessments and the need to have controls in place to identify situations where staff by-pass authorised communication channels while discussing work related matters and business with external parties.
Multiple enforcement actions
The US Securities and Exchange Commission (SEC) recently announced that it has charged and fined 16 more investment firms (broker-dealers and investment advisers) for breaching recordkeeping requirements when their employees used “off-channel” communications to discuss company business.
Employees used personal text messages to make investment recommendations and provide advice. These messages were not recorded, maintained, or preserved in violation of the federal securities laws. These breaches meant that the SEC did not have access to these off-channel communications when conducting their investigations.
Investigations and controls undermined
Given that unauthorised communications can significantly undermine regulatory investigations into potential insider dealing and market manipulation, as well as the effectiveness of a firm’s internal market abuse controls, we expect this to remain an area of focus for regulators globally. Between 2020 and 2022 alone, US regulators imposed fines of $2.7 billion on financial firms for a range of different market abuse behaviours across all asset classes (Source: Deloitte Market Abuse Outlook 2022).
Financial and reputational damage
The majority of firms already have trade surveillance platforms in place, but these latest fines, which amounted to more than $81 million, highlight the critical need for firms to implement robust and comprehensive controls and solutions to monitor electronic communications as well. Although the fines have a financial effect on firms, there is the reputational damage that also needs to be considered. For example, the SEC publicly censured the firms and ordered them to “cease and desist” from future violations of the relevant recordkeeping provisions.
In addition, a fine of $350 million was also recently imposed in the US on an investment bank, as a sub-set of trading and order data had not been feeding into their surveillance platforms. This further highlights the importance of checking the completeness of trading, order and communication feeds from a surveillance perspective.
Trade and Communication surveillance controls
As firms navigate the evolving regulatory landscape and ongoing enforcement actions, the need to adopt and embrace new processes, controls, and technologies for a proactive approach to trade and communication surveillance is now more evident than ever.
At Kaizen we work with our clients to ensure an understanding of both the regulatory obligations and the business benefits of monitoring trading activity as well as on and off-channel communications. By working with firms across the buy-side and sell-side, we are able to ensure our clients adopt best practices and benefit from the latest technological innovations.
- As regulators focus more on this area, please reach out to learn more about the ways we can assist you.
