On December 17, 2021, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) announced that each had entered into an agreement with J.P. Morgan Securities (the “Company”) to resolve issues related to the Company’s books-and-records obligations. The agencies alleged that, over a period of several years, the Company failed to maintain and preserve copies of certain communications pursuant to recordkeeping rules for broker-dealer firms, swap dealers and future commission merchants – including WhatsApp and text messages on employee personal devices. The Company admitted that its conduct was not in compliance with Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4(b)(4) and 171-4(j) thereunder as well as Section 4(s)(h)(1)(B) of the Commodity Exchange Act and Regulations 166.3 and 23.602, and agreed to pay a total of $200 million to resolve the allegations ($125 million to the SEC and $75 million to the CFTC).
Federal laws require firms to comply with recordkeeping and books-and-record obligations to aid the agencies’ investigations and enforcement efforts. The Company had policies to ensure compliance with such obligations. Under those policies, Company-approved communication methods are monitored, and when appropriate, preserved. Employees were further advised that, under those policies, the use of unapproved electronic communications methods was prohibited. Nevertheless, the Company admitted that as early as July 2015 through November 2020, its employees communicated about business matters on their personal devices, such as text messages, WhatsApp, and personal email accounts, including with respect to the firm’s securities business, investment strategy, and client meetings.
The SEC and CFTC orders indicated that they learned about the employees’ use of personal devices after issuing third-party subpoenas for communications in other investigations, and receiving productions of communications they had not received from the Company.
The resolutions are clearly intended to send a significant message to the industry. The SEC announced that it has already commenced additional investigations of record preservation practices at financial firms (something that had previously been reported but which the SEC rarely confirms). And it also stated: “Firms that believe that their record preservation practices do not comply with the securities laws are encouraged to contact the SEC,” providing a specific e-mail address for self-disclosures. In addition, the SEC’s Director of Enforcement stated that “[w]e encourage registrants to not only scrutinize their document preservation processes and self-report failures such as those outlined in today’s action before we identify them, but to also consider the types of policies and procedures JPMorgan implemented to redress its failures in this case.” Accordingly, SEC and/or CFTC registered companies and firms may wish to consider their own practices and compliance in this area, as well as the controls the required as part of this settlement.
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SEC Settlement Order