SEC, CFTC Fine 11 Financial Firms Nearly $2 Billion for Recordkeeping Failures

The Securities and Exchange Commission and the Commodity Futures Trading Commission, fined 11 of the world’s largest financial firms nearly $2 billion for failing to maintain, preserve, and produce electronic communications and records.

The 11 companies, which have acknowledged violating recordkeeping provisions of securities laws, include Bank of America, Barclays, Cantor Fitzgerald, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Jefferies, Morgan Stanley, Nomura Securities International, and UBS.

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According to the regulators, over a span of nearly four years, the firms’ employees routinely communicated business matters via text messages on their personal devices. And regulators said the companies failed to maintain or preserve a large majority of the off-channel communications, which is in violation of the federal securities laws. The violations involved employees at multiple levels of authority, including supervisors and senior executives, the regulators said.

The companies agreed to pay the SEC more than $1.1 billion in combined penalties. Barclays, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS agreed to pay $125 million each. Jefferies and Nomura each agreed to pay $50 million, while Cantor Fitzgerald agreed to pay a $10 million penalty to the SEC.

“By failing to maintain and preserve required records relating to their businesses, the firms’ actions likely deprived the Commission of these off-channel communications in various Commission investigations,” said SEC Chair Gary Gensler in a statement.

Each of the firms and certain subsidiaries were charged with violating recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to prevent and detect those violations. In addition to the fines, each company was ordered to cease and desist from future violations of the recordkeeping provisions and were censured.

The companies also agreed to hire compliance consultants to conduct comprehensive reviews of their policies and procedures relating to retaining electronic communications used on personal devices and addressing non-compliance by employees.

“As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications Gensler said in a statement.

Separately, the CFTC settled charges against swap dealer and futures commission merchant affiliates of the 11 firms, which agreed to pay the regulator more than $710 million in penalties combined.

Bank of America agreed to pay the CFTC $100 million, while Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS agreed to pay the regulator $75 million each. Nomura agreed to pay $50 million, while Jefferies and Cantor Fitzgerald agreed to pay the CFTC $30 million and $6 million. respectively.

Bank of America and Nomura neither admitted nor denied certain specific findings of the CFTC’s Division of the Enforcement’s investigation, according to the CTFC release.

“Recordkeeping requirements are key to the Commission’s oversight of registrants and a registrant’s disregard of its obligations threatens the Commission’s ability to effectively and efficiently conduct examinations and investigations,” Acting Director of Enforcement Gretchen Lowe said in a statement. “Registrants and other market participants subject to the federal commodities laws and regulations are encouraged to examine their own internal controls and supervision to ensure they are in compliance.”

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Tags: Barclays Capital, BofA Securities, CFTC, Citigroup Global Markets, Commodity Futures Trading Commission, Credit Suisse Securities, Deutsche Bank Securities, DWS Distributors, DWS Investment Management Americas, Goldman Sachs, Jefferies, Merrill Lynch, Morgan Stanley, SEC, Securities and Exchange Commission, Smith Barney, UBS Financial Services, UBS Securities

Net investment flow into hedge funds was negative $11.66 billion in August, according to a recent report from Nasdaq’s eVestment. This marks the third consecutive month of negative net flows for the hedge fund industry. Industrywide, $44.93 billion has been redeemed from hedge funds this year, which replicates a recent pattern. In 2016, 2018, 2019 and 2020, the average annual outflow was $77 billion, leaving 2022 on pace with those years. Historically, the second half of the year tends to be negative for hedge fund flows, with December having the greatest number of redemptions in most calendar years.

Long/short equity, credit and macro-based hedge fund strategies have seen continued redemption pressure this year, which remained in August. Macro-based strategy saw the largest monthly outflows, with $3.68 billion of investor money leaving, followed by long/short equity funds, which saw outflows of $3.03 billion.

Long/short equity funds have had particularly high redemptions. So far this year, the long/short hedge-funds have lost $25.06 billion to redemptions. Over 60% of funds in this strategy segment have lost assets this year, the eVestment data show. Directional credit funds ranked second, with redemptions of $21.23 billion.

Managed future funds, which have been the best-performing hedge fund strategy, returning 9.97% year-to-date in 2022, also saw negative investment flows in August, as performance in the strategy has cooled off in recent months.

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The only category to see net inflows in the month was multistrategy funds. The data show that investors this year lack conviction toward any single hedge fund strategy and prefer to access a diversified set of strategies with a single allocation.

Despite the trend of outflows in recent years, the hedge fund sector still holds $3.49 trillion in assets after strong performances—with average annual returns of 9.29% in 2019, 2020 and 2021.

Tags: eVestment, fund flows, Hedge Funds