BGC Financial, L.P. agreed to pay a fine of US $1.25 million to the Securities and Exchange Commission for inadvertently deleting audio files containing communications of eight registered representatives requested by the Commission and for not accurately documenting and maintaining records of various employees’ gifts and expenses. BGC is an inter-dealer broker registered with the SEC.

According to the SEC, in March 2014, SEC staff issued two requests for communications of the eight salespersons, including recorded telephone conversations. However, in 2013, BGC had updated its record retention policies to provide that digital audio recordings should only be maintained for one year. In response, BGC promptly began to delete existing dated audio recordings; however, no recordings of the eight salespersons were eliminated because of a prior litigation hold.

However, when the prior litigation hold expired in May 2014, audio recordings responsive to the SEC’s March 2014 request were inadvertently deleted because relevant BGC audio technicians were not advised of the SEC’s new request, said the SEC.

BGC discovered this situation shortly after the deletion and self-reported it to SEC staff.

Separately, the SEC claimed that, from 2014 to 2016, BGC sometimes did not properly document gifts and expenses of certain high performing registered representatives.

The SEC said that the firm did not reflect as compensation on its records season tickets for an unnamed New York sports team that were used personally by one salesperson, and sometimes reflected expenditures for two brokers as business expenses, when the relevant registered representatives failed to provide expenses reports with the names of attending customers or identified customers in attendance that were not present. Additionally, claimed the SEC, sometimes BGC reimbursed registered representatives for expenses, when in fact the salespersons were not present for the relevant activity; as a result, such expenditures should have been reflected on BGC's records as gifts.

Separately, BGC, on its own, determined that an expense administrator used a corporate credit card in another employee’s name to likely misappropriate US $1.3 million for personal expenses.

As a result of these episodes, the SEC said that BGC failed to keep and maintain accurate books and records of its expenses.

Unrelatedly, two US-based Deutsche Bank subsidiaries agreed to pay a fine of almost US $75 million in connection with their purported faulty handling of so-called “pre-released” American Depository Receipts. According to the SEC, the Deutsche Bank entities’ practices permitted pre-released ADRs to be used for impermissible practices, including inappropriate short selling and profiting around dividend payouts.

In January 2017, ITG Inc. agreed to pay a fine and disgorgement totaling US $24.4 million to settle charges brought by the SEC that it caused the issuance of pre-release ADRs since at least 2011 when it did not take reasonable steps to ensure that the concomitant number of the underlying shares were owned and custodied by the person on whose behalf ITG was acting, as required by SEC rule. (Click here to access the relevant SEC order.) Later last year, Anthony Portelli, a former managing director of ITG, agreed to pay US $100,000 to the SEC for failing to reasonably supervise personnel on ITG’s securities lending desk which purportedly resulted in the improper pre-release ADR practices. (Click here for details in the article “ Former Broker-Dealer Operations Head Charged with Supervisory Failure for Firm’s Improper ADR Handling” in the June 25, 2017 edition of Bridging the Week.)

An ADR is a negotiable certificate that ultimately evidences ownership of shares of a non-US company that have been deposited with a depository bank. In a lawful pre-release transaction, foreign shares have been purchased but not yet delivered to a custodian; in such circumstances, the shares must be owned and custodied by the person on whose behalf the pre-released ADRs are obtained. 

Compliance Weeds1: The Financial Industry Regulatory Authority prohibits members and persons associated with members to directly give or permit to be given anything of value, including gratuities, in excess of US $100/year to any person associated with another person where such payment or gratuity “is in relation to” the business of the employer of the recipient of the payment or gratuity. This prohibition is not meant to preclude contracts for personal services. However, members must maintain a distinct record of all payments and gratuities in any amount and all contracts for personal services, and retain such records in accordance with ordinary SEC recordkeeping requirements. (Click here to access FINRA Rule 3220.) In September 2016, FINRA proposed to increase authorized gifts to US $175/person/year and to amend its gifts and non-compensation rules and interpretations. (Click here for background in the article “FINRA Proposes to Update Gifts, Gratuities and Non-Cash Compensation Rules; Recommends Gift Threshold Increase” in the August 14, 2016 edition of Bridging the Week.)

Similarly, the Chicago Mercantile Exchange and the Chicago Board of Trade prohibit members, member firms and broker associations and their employees from giving gifts or gratuities in excess of US $100/year to any employee of another member, member firm or broker association. Curiously, such prohibition does not exist for entities or persons that are solely members of the New York Mercantile Exchange and the Commodity Exchange, Inc. (Click here to access the relevant CME Group Market Regulation Advisory Notice.)

Compliance Weeds2: To minimize the likelihood of regulatory issues, registered entities need to think holistically. Important information that is not shared from one part of an organization with another often leads to regulatory problems. Broker-dealers have been sanctioned by the SEC and FINRA for failing to file suspicious activity reports to the Financial Crimes Enforcement Network of the United States Department of Treasury where there were red flags of potentially illicit customer behavior that touched different departments. (Click here for an example in the article “Two Related Broker-Dealers to Pay US $17 Million for Widespread AML Compliance Failures; Former AML Compliance Officer Also Sanctioned” in the May 22, 2016 edition of Bridging the Week.)