Since the Biden administration come into office in January 2021, regulators have been cracking down on the private sector. Regulators have scrutinized significant mergers and acquisitions, investigated brokerages' handling of customer orders, and started to impose reporting requirements on cryptocurrency economy.
Banks were the latest sector to get caught in the government's crosshairs. On Sept. 27, regulators announced $1.8 billion in penalties to be paid by some of the U.S.'s biggest banks. Regulators found that these institutions violated federal securities laws relating to record keeping when employees used messaging apps outside the bank's formal communications and compliance systems to discuss work-related topics. Several major banks were nailed. Here's who got the worst of it.
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How a JPMorgan trader triggered federal regulators
It started in early 2020 when JPMorgan Chase (JPM 1.44%) found out one of its credit traders was using WhatsApp group chats to discuss market chatter with other employees. This is a big no-no, violating JPMorgan's code of conduct and federal securities laws that have been in place since the 1930s. JPMorgan put the trader on leave and subsequently fired him for his actions.
When the pandemic hit, remote work became the norm. However, banks were concerned about employee communications and how they could ensure they complied with federal record-keeping laws.
Financial institutions must keep records of all communications between employees relating to their work. Apps like WhatsApp have end-to-end encryption and are outside these institutions' official communication channels for employees. Once the Securities and Exchange Commission (SEC) caught a whiff of this, its inspection unit alerted companies about strengthening their record-keeping requirements.
In December, JPMorgan admitted to failures firm-wide from January 2018 through November 2020 when it came to record keeping and settled with the SEC for $125 million -- the largest record-keeping fine at the time, according to CNBC. The bank also settled with the Commodity Futures Trading Commission (CFTC) for $75 million, bringing its total penalties to $200 million.
The other financial institutions that faced big fines
In total, the SEC fined financial institutions $1.1 billion, while the CFTC fined them an additional $710 million. In a statement by SEC Chair Gary Gensler, "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."
The institutions hit with the biggest fines are as follows:
- Bank of America: $225 million
- Citigroup: $200 million
- Goldman Sachs: $200 million
- Morgan Stanley: $200 million
- Credit Suisse: $200 million
- Barclays: $200 million
- Deutsche Bank: $200 million
- Nomura: $100 million
- Jefferies: $80 million
Regulators continue flexing their muscles
The fines represent a sizable portion of these financial institutions' earnings over the past 12 months. For JPMorgan, the penalty represents over 5% of its net income over the last year. For Bank of America, it was 8% of net income, Citigroup was 12%, Goldman Sachs was 12%, and Morgan Stanley was 15%.
Gensler stated that "record-keeping and books-and-records obligations have been an essential part of market integrity and a foundational component of the SEC's ability to be an effective cop on the beat." These records are crucial for the SEC when performing examinations and enforcement work and are necessary when investigating fraud or insider trading cases. Regulators have flexed their muscles in recent years -- with this round of banking fines as the latest example.
