JPMorgan Chase has agreed to pay $200 million in fines to two US banking regulators to resolve allegations that its Wall Street business allowed workers to dodge federal recordkeeping regulations by using WhatsApp and other platforms.
JPMorgan Securities agreed to pay $125 million to the Securities and Exchange Commission on Friday after admitting to "widespread" recordkeeping errors in recent years. Additionally, the Commodity Futures Trading Commission announced Friday that it had imposed $75 million penalties on the bank for allowing illegal communications since 2015.
According to SEC officials speaking to reporters Thursday evening, JPMorgan's refusal to retain such offline conversations violated federal securities law. It rendered the regulator oblivious to the bank's interactions with its clients.
Federal law compels financial organizations to maintain comprehensive records of electronic communications between brokers and clients to ensure they are not violating anti-fraud or antitrust regulations.
This is the latest development in a long-running struggle between regulators, banks, and employees over personal device use. Policing the use of unofficial channels became even more critical during the coronavirus outbreak when most Wall Street fell dark. Regulators in New York and London have recently increased their enforcement of recordkeeping requirements in response to traders' migration to encrypted messaging services such as WhatsApp, Signal, or Telegram.
While phone conversations and messages on company-issued devices and software platforms are retained, bank compliance departments have a far harder time monitoring communications on third-party apps.
This workaround gained popularity after two of the industry's most significant trading scandals in the last decade, including Libor and foreign currency market manipulation, were linked to damning chatroom chats, resulting in multibillion-dollar fines for banks.
JPMorgan, Morgan Stanley, Deutsche Bank, and other firms have fired or placed traders on leave due to transgressions related to the practice. However, the SEC order demonstrated how widespread it is.
The SEC stated that JPMorgan's offline communication practice was widespread, and even managers and senior compliance officials utilized their devices to convey essential company topics.
JPMorgan's inquiry is ongoing, and the SEC has begun similar investigations at corporations throughout the financial industry. Bloomberg reported in June that JPMorgan instructed its traders, bankers, and financial consultants to save work-related messages on personal devices. According to SEC officials, the messages contained information about a variety of topics, including investment strategies, client meetings, and market views.
JPMorgan declined to comment more than recognize agreements with the two agencies in a regulatory filing.
In addition to the punishment, the SEC stated that JPMorgan agreed to employ a compliance expert to review the bank's rules and training. The bank had already begun upgrading employees' software to ensure compliance, according to the SEC.
"As technology advances, it is even more critical for registrants to ensure that their communications are properly recorded and do not take place outside of authorized channels in order to evade market oversight," SEC Chairman Gary Gensler said in a press statement.
Gensler emphasized the necessity of meticulous recordkeeping by referencing the 2013 foreign exchange scandal, in which traders at multiple significant banks conspired to rig currency prices to maximize profits through the use of private chat rooms dubbed "The Cartel."
Five of the world's top banks, including JPMorgan, finally agreed to pay a combined total of more than $5 billion in penalties and enter plea agreements to conclude the probe.
"Books-and-records requirements assist the SEC in conducting critical examinations and enforcement activities," Gensler stated. "They contribute to the development of trust in our system."
While the $125 million penalty is the SEC's highest recordkeeping penalty to date, the more significant threat to JPMorgan may be reputational. By pursuing JPMorgan, the world's largest Wall Street firm in terms of overall revenue.
Gensler has had a banner week, having released a slew of suggestions on Wednesday to protect money market funds and limit executives' capacity to trade their own businesses' equity.
Taken together, the plans and enforcement actions indicate that the Biden appointee is on a collision course with drafting and enacting one of the most ambitious policy agendas in decades.
Numerous investors view him as the leader the SEC requires to develop comprehensive cryptocurrency regulation, safeguards around unique purpose acquisition companies, or SPACs, standardized climate disclosures for public companies, and rules governing online brokerage marketing and securities trading "gamification."
Additionally, the enforcement action represents a watershed moment for SEC Enforcement Director Gurbir Grewal, who has warned for months that greater enforcement would become.
Restoring public trust in Wall Street will involve "vigorous enforcement of laws and rules governing required disclosures, misuse of nonpublic information, failure to comply with recordkeeping obligations, and obfuscation of evidence from the SEC or other government agencies," he stated in October.
Along with his focus on Wall Street's accounting, Grewal is exploring ways for the SEC to prevent misbehavior in the first place, a concept he refers to as "prophylactic" measures.
Grewal has explicitly stated that he intends to be aggressive in requiring guilty corporations – in this case, JPMorgan — to acknowledge their transgressions publicly.
"Recordkeeping requirements are critical to the Commission's enforcement and examination programs, and when firms violate them, as JPMorgan did, they jeopardize our ability to protect investors and maintain market integrity," Grewal said in a statement Friday.
