he Securities and Exchange Commission and the Commodity Futures Trading Commission announced that they have agreed to work more closely and collaborate more on regulatory issues and enforcement. The agencies say the agreement, documented in a “memorandum of understanding,” will allow the agencies to better support lawful innovations, uphold market integrity, reduce regulatory overlap, and protect investors and customers.

The agreement is a formal, non-binding document that outlines a plan to collaborate between the two agencies, which also details roles, responsibilities, and goals without creating legally enforceable obligations.

“The MOU shows the agencies’ commitments to provide fair notice to market participants, respect individual liberty, and foster lawful innovation with the minimum amount of regulation to enhance U.S finance competitiveness,” the SEC says. The main intention was to resolve the conflict between the agencies and provide a framework of cooperation, particularly on cryptocurrencies and digital assets.

In conjunction with the MOU, the agencies have created what they are calling a “joint harmonization initiative” to advance coordinated oversight and promote regulatory clarity in areas of common regulatory interest. The initiative will support coordination across the policymaking, examination, and enforcement functions of each agency, particularly for joint applications and shared policy efforts, including:

• Clarifying product definitions through joint interpretations and rulemakings.
• Modernizing clearing, margin, and collateral frameworks.
• Reducing frictions for dually registered exchanges, trading venues, and intermediaries.
• Providing a fit-for-purpose regulatory framework for crypto assets and other emerging technologies.
• Streamlining regulatory reporting for trade data, funds, and intermediaries.
• Coordinating cross-market examinations, economic analyses, risk monitoring, surveillance, and enforcement.

“America’s financial markets are the envy of the world because they scale and adapt to meet investor demands. Like our markets, the CFTC’s and SEC’s regulatory frameworks must also evolve and modernize to accommodate the needs of our market participants,” said CFTC Chairman Michael Selig. “This Memorandum of Understanding solidifies the agencies’ commitment to harmonize regulatory frameworks to provide comprehensive and seamless financial market oversight. By working together, we’ll eliminate duplicative, burdensome rules and close gaps in regulation for the benefit of all Americans and usher in a golden age of American finance.” 

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This announcement comes weeks after Commissioners Summer Mersinger and Christy Goldsmith Romero announced that they intend to leave the agency by the end of the month. As a result of these announcements and the departure of former Chairman Rostin Behnam earlier this year, only acting Chair Caroline Pham remains.

While Pham remains at the CFTC, she does not intend to do so for too much longer, either. Pham has made it known that once Trump’s nominee for CFTC chair, Brian Quintenz, is confirmed, she will immediately leave the agency.

As a result of the CFTC’s significant vacancies, many expect and are preparing for disorder. Sharon Bowen, an ex-CFTC commissioner stated that when she departed the agency in 2017, it was mostly due to her experience under a two-member commission. “Having just two commissioners makes routine business difficult, but makes important policy decisions almost impossible,” Bowen said. “Without a full complement of commissioners to consider the far-reaching implications of our decisions, we are frozen in place while the markets we regulate are moving faster every day.”

However, CFTC spokesperson, Taylor Foy, said in a statement that the agency can still operate and function effectively regardless of its commissioner vacancies. “Vacancies do not impact the commission’s ability to vote on agency matters or the day-to-day work of CFTC divisions,” Foy said, per the report.

 Johnson was most notably nominated during the Biden administration. Now that she has completed her three-year term as commissioner at the CFTC, Johnson believes it is time to step away from the role and pursue new opportunities yet to be specified.

With only Commissioner Pham remaining, there are some legal contentions that may be implicated in a situation in which the CFTC is comprised of one member. Many believe that having one member to set forth an agenda can pose issues under the government’s checks and balances system. However, with Pham’s inevitable departure incoming, it is difficult to see if such contentions will be brought.  

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The draft provides clearer guidance on when a digital asset falls under the jurisdiction of the SEC, the CFTC, or both. Essentially, the draft would grant power and funding to the CFTC and require firms to register with the it as well. The SEC, on the other hand, would retain oversight over securities and specific hybrid assets. It will also have the authority to oversee digital commodity activities by SEC-registered broker-dealers and exchanges, even though the  firms will be required to register the activity with the CFTC as well.

In addition to allocating oversight authority to the SEC and CFTC, the draft also provides key crypto definitions such as definitions for “digital commodity,” “blockchain system,” and “stablecoins.” In fact, it explicitly excludes digital commodities and payment stablecoins from the definitions of a security.

This draft represents a longstanding effort by the Republican Party to regulate digital assets. According to many, the digital assets market is in need of regulation as it is unstable and dangerous without such.  “We made historic progress in the 118th Congress to build bipartisan, bicameral consensus in crafting a functional regulatory framework for digital assets,” House Financial Services Committee Chair French Hill said. “Our discussion draft builds upon that work and provides much-needed regulatory clarity for the digital asset ecosystem by protecting consumers and safeguarding the long-term integrity of digital asset markets in the United States.”

Congress in Disagreement as to how Crypto Should be Regulated

Although many are in support of such regulations, many are skeptical of how exactly it will be regulated and whether this bill represents the most efficient and effective way of doing so. Congresswoman Maxine Waters announced that she intends to block the draft as she is concerned with conflicts of interest that may arise from the Trump family crypto investments.

Other senators, such as Ruben Gallego said that he understands the need to regulate digital assets but yet finds issue with how the bill itself addresses such a use. “[T]he bill as it currently stands still has numerous issues that must be addressed, including adding stronger provisions on anti-money laundering, foreign issuers, national security, preserving the safety and soundness of our financial system, and accountability for those who don’t meet the act’s requirement,” a group of Democratic Senators led by Gallego said. Although they are against the bill’s current version, they are “eager to continue working with our colleagues to address these issues.”

While both the Democratic and Republican parties are in agreement that the digital asset market should be a regulated one, the parties are in some sort of disagreement as to how exactly it should be regulated. Additional hearings are scheduled to take place to hear each side’s views on the matter.  

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Benham announced his plans to resign in a statement in which he expressed his gratitude to the Commission for all the effort and work it put in in order to drive growth and strength in the financial markets. He also thanked President Joe Biden, Senator Chuck Schumer, and Senator Debbie Stabenow for their support.

“Over the past several years, a multitude of domestic and global events tested the resilience of all financial markets,” Behnam said in the statement. “I am proud that the Commission consistently made deliberate and intentional decisions to ensure continued strength.”

Benham was well-known for his unsuccessful effort in convincing Congress to allow the CFTC to oversee the cryptocurrency industry. Although Congress did not authorize such oversight, Benham was successful in bringing enforcement actions against two notorious cypto companies, Binance and FTX. More recently, a cypto exchange company, Gemini, agreed to pay a $5 million fine to the Commission for allegations that it misrepresented certain aspects of a proposed bitcoin future’s contract.

The Future of the Crypto Industry

President-elect Trump has somewhat recently moved to a “crypto-friendly” stance. Trump and his family back their own crypto project, World Liberty Financial, which recently got a $30 million investment from Justin Sun, a crypto entrepreneur. As a result, it is expected that his administration will push for crypto-friendly rules. During his campaign, the President promised to make America “the crypto capital of the planet” by bringing in those who had a similar stance on crypto. He recently picked Paul Atkins, a lawyer known for his backing of the crypto industry, as his pick to lead the Securities and Exchange Commission. chair of the Securities and Exchange Commission. He also appointed former PayPal executive David Sacks to the new role of AI and crypto czar, more signs that he intends to change American policy and boost cryptocurrency.

Although Benham will be resigning on Inauguration Day, he will remain with the agency until February 7^th in order to ensure a smooth transition.  

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The SEC announced that the firms admitted their failures, acknowledged that their conduct violated numerous recordkeeping provisions of the federal securities laws, agreed to pay combined $392.75 million in fines, and have begun implementing improvements to their compliance policies and procedures to address these violations. The charged firms included well known banks such as RBC Capital Markets, BNY Mellon, TD Securities, Edward D. Jones, and many more.

These charges represent the government’s ongoing mission of suppressing off-channel communications between broker-dealers and investment advisors. “As today’s enforcement actions against more than two dozen firms reflect, we remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation.”

Each of the SEC’s investigations uncovered longstanding use of unapproved off-channel communications at these firms. As described in the SEC’s orders, the firms admitted that their employees sent and received off-channel communications that were records required to be maintained under the securities laws. The failure to maintain and preserve required records deprives the SEC of these communications in its investigations. The failures involved personnel at multiple levels of authority, including supervisors and senior managers.

The firms were each charged with violating certain recordkeeping provisions of the Securities Exchange Act, the Investment Advisers Act, or both. The firms were also each charged with failing to reasonably supervise their personnel with a view to preventing and detecting those violations.

CFTC Fines Banks for Failing to Uphold Recordkeeping Requirements

The CFTC fined multiple banks for similar recordkeeping violations. The Commission discovered that multiple financial institutions did not stop their employees from communicating through off-channel platforms such as IMessage or WhatsApp. The CFTC additionally found that the firms did not preserve the communications which added onto its violations

According to the CFTC, some firms, such as Truist Bank self-reported their violations which was heavily accounted for when determining their respective penalties. “In responding to an industry-wide and consequential problem, Truist set itself apart from the more than 20 other registrants the CFTC brought actions against for use of unapproved communications methods. How? Truist made the decision to self-report to the Division of Enforcement it had serious recordkeeping and supervisory failures. It is the only registrant to do so,” said Director of Enforcement Ian McGinley.

“Truist’s decision to self-report, cooperate, remediate, and be held accountable allowed it to benefit in the form of a substantially reduced penalty,” Director McGinley added. “At the same time, the CFTC’s message remains clear—recordkeeping and supervision requirements are fundamental, and registrants that fail to comply with these core obligations do so at their own peril.”

These charges once again display the government’s mission in combatting off-channel communications among broker-dealers and investment advisors. This is not the first time that they have gone after broker-dealers and investment advisors for their use of off-channel communications as a means to do business. In August 2023, the SEC and CFTC collected $555 million in penalties for recordkeeping failures and in 2022 the agencies collected $1.8 billion for similar conduct.  

Jacob Horowitz is a contributing editor at Compliance Chief 360° 

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On Dec. 11, Bankman-Fried was arrested in the Bahamas on federal criminal charges at the direction of the U.S. Attorney for the Southern District of New York, just one day before preparing to testify before the House Committee on Financial Services about why FTX, once valued at $32 billion, collapsed and filed for Chapter 11 bankruptcy protection in November.

In testimony at that same hearing, John Ray, FTX’s new chief executive who was brought in to clean up the mess, commented, “I don’t trust a single piece of paper in this organization.” He went on to say the case isn’t as complex as some are making out, but rather, “old-fashioned embezzlement.”

“This is just taking money from customers and using it for your own purpose,” Ray said. “Not sophisticated at all,” he continued, explaining that what might have been sophisticated about the scheme was hiding it in plain sight.

Ray has been tasked with implementing a restructuring plan that will serve as the roadmap for navigating the FTX debtor entities through Chapter 11 and to a final resolution with its customers and creditors. He previously served as chairman of Enron Creditors Recovery Corp., a company tasked with recovering creditor funds from Enron in the wake of its accounting scandal and subsequent collapse.

In his testimony, Ray described a long list of what he called “unacceptable management practices” at the FTX Group, including the following:

• The use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets, without security controls to prevent them from redirecting those assets;
• The storing of certain private keys to access hundreds of millions of dollars in crypto assets without effective security controls or encryption;
• The ability of Bankman-Freid controlled hedge fund Alameda to borrow funds held at FTX.com to be utilized for its own trading or investments without any effective limits;
• The commingling of assets;
• The lack of complete documentation for transactions involving nearly 500 investments made with FTX Group funds and assets;
• The absence of audited or reliable financial statements;
• The lack of personnel in financial and risk management functions; and
• The absence of independent governance throughout the FTX Group.

Details of the Fraud

In an eight-count indictment, unsealed Dec. 13, the Department of Justice charged Bankman-Fried with wire fraud, commodities fraud, securities fraud, money laundering, and a scheme to defraud the Federal Election Commission and commit campaign finance violations. The DoJ did not go into any further detail in its indictment. Five of the charges each carry a maximum sentence of 20 years in prison; three others carry a maximum sentence of five years each.

The Securities and Exchange Commission Dec. 12 separately filed securities fraud charges in the Southern District of New York against Bankman-Fried. According to the SEC’s complaint, since at least May 2019, Bahamas-based FTX raised more than $1.8 billion from equity investors, including approximately $1.1 billion from 90 U.S.-based investors.

“In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets,” the SEC said. In reality, according to the SEC complaint, Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors:

• The undisclosed diversion of FTX customers’ funds to Alameda Research, Bankman-Fried’s privately held crypto hedge fund;
• The undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures; and
• The undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.

The SEC complaint further alleged Bankman-Fried “used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.”

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said SEC Chair Gary Gensler. “The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws.”

“Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business,” Gensler added. “It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”

“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service—but as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike.”

The SEC’s complaint charges Bankman-Fried with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. It seeks injunctions against future securities law violations; an injunction that prohibits Bankman-Fried from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar. Investigations into other securities law violations and into other entities and individuals relating to the alleged misconduct are ongoing, the SEC said.

CFTC Action

In a third parallel enforcement action, the Commodity Futures Trading Commission (CFTC) filed a complaint in the U.S. District Court for the Southern District of New York against Bankman-Fried, FTX Trading, and Alameda. All three were charged with fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce. The CFTC complaint further asserts that the scheme resulted in the loss of over $8 billion in FTX customer deposits.

According to the CFTC complaint, from at least May 2019 through Nov. 11, 2022, Bankman-Fried controlled both FTX.com and Alameda. As charged, FTX held itself out as “the safest and easiest way to buy and sell crypto” and represented that customers’ assets, including both fiat and digital assets including bitcoin and ether, were held in “custody” by FTX and segregated from FTX’s own assets.

“To the contrary, FTX customer assets were routinely accepted and held by Alameda and commingled with Alameda’s funds,” the CFTC said. “Alameda, Bankman-Fried, and others also appropriated customer funds for their own operations and activities, including luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.”

The CFTC complaint further alleges that, at Bankman-Fried’s direction, FTX employees created features in the FTX code that favored Alameda and allowed it to execute transactions even when it did not have sufficient funds available, including an “allow negative flag” and effectively limitless line of credit that allowed Alameda to withdraw billions of dollars in customer assets from FTX.  These features were not disclosed to the public.

In its continuing litigation, the CFTC seeks restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations.

Compliance Overhaul

Ray described the restructuring plan for FTX as having five core objectives, as described below:

Implementation of risk management, compliance, and security controls: This objective, which he said is already underway, “involves building accounting, audit, cash management, cybersecurity, human resources, risk management and other systems that did not exist, or did not exist to an appropriate degree, prior to my appointment.”

As part of this objective, a new management team will be brought on board. Among the company’s new appointments include the hiring of a new chief financial officer; a new head of human resources and administration; and a new head of information-technology, “all of whom have deep experience in their areas of core competency and have also managed other, large-scale corporate failures,” Ray said.

A team of independent third-party professionals has also been engaged in the “necessary areas of restructuring, forensic accounting, tax disciplines, and cybersecurity, including Alvarez & Marsal, Alix Partners, Ernst & Young, respectively, along with a cybersecurity firm,” he said.

Asset protection and recovery: We are working around the clock to locate and secure the property of the estate, a substantial portion of which may be missing, misappropriated, or not readily traceable due to the lack of proper record keeping. “We are working with Nardello & Company, Chainalysis, BitGo, Alvarez & Marsal and our cybersecurity firm on these recovery efforts,” Ray said. Thus far, more than $1 billion of digital assets to protect against the risk of theft or unauthorized transfers have been secured.

Transparency and investigation: Our investigative and cyber security teams, led by the law firm Sullivan & Cromwell, are already well into the process of gathering the evidence that will provide us with an understanding of what led to this collapse. They are working in close coordination with U.S. and foreign regulatory and law enforcement authorities. In addition, the entire process is being overseen by a newly appointed independent board of directors, chaired by former U.S. Attorney and Chief Judge for the U.S. District Court for the District of Delaware, the Honorable Joseph Farnan.

Efficiency and coordination: This objective requires cooperation and coordination with insolvency proceedings of subsidiary companies in other jurisdictions.

Maximization of value for stakeholders: “A fundamental, overarching challenge with each of these objectives is that we are, in many respects, starting from near-zero in terms of the corporate infrastructure and record-keeping that one would expect to find in a multi-billion-dollar international business,” Ray said. “Still, in just over four weeks since assuming control of FTX, we have instituted meaningful steps to gain command and control and are well on our way to achieve the goals outlined above.”

The scope of the investigation is “enormous,” Ray said, and involves “detailed tracing of money flows and asset transfers from the time of FTX’s founding and highly complex technological efforts to identify and trace crypto assets.” Currently, “dozens of terabytes of documents and data, including records of billions of individual transactions,” are being collected and reviewed, he added, “and we are leveraging sophisticated technology and expertise to identify and trace additional transactions and assets.”

All information gained will be summarized in a manner useful not only to the bankruptcy estate, but also to governmental and regulatory stakeholders, Ray said. “We know that our investigative record will be the foundation for work done by many others, and we are committed to building a reliable foundation.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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In the SEC case, charges were brought against 15 broker-dealers and one affiliated investment adviser for “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications,” the SEC said.

The following eight firms and five affiliates will pay penalties of $125 million each:

• BofA Securities, together with Merrill Lynch, Pierce, Fenner & Smith;
• Barclays Capital;
• Citigroup Global Markets;
• Credit Suisse Securities (USA);
• Deutsche Bank Securities, together with DWS Distributors and DWS Investment Management Americas;
• Goldman Sachs;
• Morgan Stanley, together with Morgan Stanley Smith Barney; and
• UBS Securities, together with UBS Financial Services.

In addition, Jefferies and Nomura Securities International have agreed to pay penalties of $50 million each, and Cantor Fitzgerald has agreed to pay a $10 million penalty.

According to the SEC, from January 2018 through September 2021, the firms’ employees “routinely communicated about business matters using text messaging applications on their personal devices” and “did not maintain or preserve the substantial majority of these off-channel communications in violation of the federal securities laws.”

“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,” the SEC stated. “The failings occurred across all of the 16 firms and involved employees at multiple levels of authority, including supervisors and senior executives.”

According to the SEC, the firms admitted the facts set forth in their respective SEC orders and acknowledged that their conduct violated recordkeeping provisions of the federal securities laws.

“The firms also agreed to retain compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures,” the SEC stated.

Each broker-dealer has been charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing reasonably to supervise with a view to preventing and detecting those violations. In addition to the financial penalties, each firm was ordered to cease and desist from future violations of the relevant recordkeeping provisions and were censured.

Investment adviser DWS Investment Management Americas was charged with violating certain recordkeeping provisions of the Investment Advisers of 1940 and with failing reasonably to supervise with a view to preventing and detecting those violations.

“These actions deliver a straightforward message to registrants: You are expected to abide by the Commission’s recordkeeping rules,” said Deputy Director of Enforcement Sanjay Wadhwa. “The time is now to bolster your record retention processes and to fix issues that could result in similar future misconduct by firm personnel.”

“Other broker dealers and asset managers who are subject to similar requirements under the federal securities laws would be well-served to self-report and self-remediate any deficiencies,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement.

CFTC settlements
The CFTC announced separate settlements, in which it issued orders simultaneously filing and settling charges against swap dealer and futures commission merchant (FCM) affiliates of 11 financial institutions “for failing to maintain, preserve, or produce records that were required to be kept under CFTC recordkeeping requirements and failing to diligently supervise matters related to their businesses as CFTC registrants,” the agency said.

In the CFTC action, Bank of America will pay the highest penalty of $100 million, while the following financial institutions will pay a penalty of $75 million each:

• Barclays;
• Citi;
• Credit Suisse;
• Deutsche Bank;
• Goldman Sachs;
• Morgan Stanley; and
• UBS.

In addition, Nomura will pay a $50 million penalty, while Jeffries will pay $30 million, and Cantor Fitzgerald will pay a $6 million penalty.

In the CFTC case, the settling registrants admitted the facts detailed in the orders and have been ordered to cease and desist from further violations of recordkeeping and supervision requirements and engage in specified remedial undertakings. Bank of America and Nomura neither admitted nor denied certain specific findings of the CFTC Enforcement Division’s investigation.

“Each order finds that the swap dealer and/or FCM in question, for a period of years, failed to stop its employees, including those at senior levels, from communicating both internally and externally using unapproved communication methods, including messages sent via personal text, WhatsApp or Signal,” the CFTC stated. The firms generally did not maintain and preserve such written communications, as required, “and, therefore, could not provide them promptly to the CFTC when requested.”

“Each order further finds the widespread use of unapproved communication methods violated the swap dealers’ and/or FCMs’ internal policies and procedures, which generally prohibited business-related communication taking place via unapproved methods,” the CFTC continued. “Further, some of the same supervisory personnel responsible for ensuring compliance with the firms’ policies and procedures themselves used non-approved methods of communication to engage in business-related communications, in violation of firm policy.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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In a separate case, Bank of America is setting aside $200 million to account for fines it expects the Securities and Exchange Commission and the Commodity Futures Trading Commission to impose for failing to monitor the use of unapproved personal devices by employees. The SEC has been looking into whether Wall Street banks have been adequately documenting employees’ work-related communications, such as text messages and emails, during the work-from-home period of the pandemic.

Last week, the Consumer Financial Protection Bureau (CFPB) ordered Bank of America to pay a $100 million penalty that “reflects the severity and scope of the consumer harm caused by the bank’s practices,” the CFPB stated. In a separate action, in coordination with the CFPB, the Office of the Comptroller of the Currency (OCC) fined the bank $125 million to be paid to the U.S. Treasury for violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices.

According to the findings of the CFPB’s investigation, “Bank of America automatically and unlawfully froze people’s accounts with a faulty fraud detection program and then gave them little recourse when there was, in fact, no fraud,” the CFPB stated.

In September 2020 and continuing through mid-2021, Bank of America changed its practices for investigating prepaid debit card fraud on the unemployment insurance benefit accounts, according to the CFPB. Instead of conducting investigations, the bank implemented a fraud filter that “set a low bar to freeze the unemployment insurance benefits of many people, harming thousands of legitimate cardholders needing the money,” the CFPB stated.

“The bank also retroactively applied its fraud filter to deny some notices of error submitted by prepaid debit cardholders that the bank had previously investigated and paid,” the CFPB stated.

Additionally, the bank made it difficult for consumers to unfreeze their prepaid debit cards or report fraudulent use of their cards. Those with unemployment insurance benefit prepaid debit cards could not make reports online or in person at bank branches.

Compliance Deficiencies
The OCC also found several compliance deficiencies, including inadequate risk management practices in both the front-line units and independent risk management, including ineffective oversight, risk assessment, monitoring, and reporting; inadequate internal controls, including those relating to contract management; inadequate oversight, risk management, and monitoring of prepaid card unemployment benefits vendors; and inadequate oversight and coverage by the bank’s independent audit function.

In addition to providing remediation to harmed consumers whose access to unemployment benefits was denied or delayed, the OCC order also requires Bank of America to “perform a comprehensive and holistic risk assessment … that shall address all significant risks to include at a minimum transaction and card volumes and trends; operational risks, including capacity limitations or obstacles with product service or delivery; requisite staffing skills and expertise; compliance with applicable consumer protection and information security laws and regulations; and fraud risk volume, fraud sources, and types of fraud.”

The OCC consent order further orders the bank to conduct a program gap analysis that, at a minimum, “shall address the adequacy of operational controls, fraud investigations, fraud rules and/or strategies, claims intake and processing, accounting practices, complaints management, claims and complaints quality assurance processes, systems and data management, and program vendor risk management.”

Unapproved Communications
The bank is still waiting on final action from the SEC on the improper use of personal devices by BofA employees to conduct official business. Regulators require banks to keep records of all business-related communications. To comply, financial firms typically ban the use of personal email, text messaging, and social media channels for work purposes, although bankers do not always follow those rules.

Late last year, the SEC and the CFTC fined J.P. Morgan Securities $200 million for “widespread” failures to preserve employee communications on personal devices, such as mobile phones, and messaging apps and email systems. Other top banks including Morgan Stanley and Citigroup have also put aside cash to cover similar expected regulatory fines, the banks have stated.

History of Misconduct at Bank of America
Bank of America has a history of misconduct and engaging in fraudulent practices: In April 2014, the CFPB ordered Bank of America to pay $727 million in redress to consumers harmed by the bank’s deceptive marketing and unfair credit card billing practices; In August 2014, Bank of America reached a $16.65 billion settlement—the largest civil settlement with a single entity in U.S. history­—for financial fraud that played a central role in the 2008 financial crisis; and in May 2022, the CFPB ordered Bank of America to pay a $10 million civil penalty for processing illegal, out-of-state garnishment orders against its customers’ bank accounts. 

PHOTO: BANK OF AMERICA (RESIZED), BY MIKE MOZART, USED UNDER CC BY 2.0

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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In the first action, the CFTC ordered BNP Paribas, a global financial services firm and swap dealer, to pay a $6 million civil monetary penalty, and cease and desist from violating the applicable provisions of the CEA and CFTC regulations. BNPP must further produce, within one year, a written report to the CFTC Division of Enforcement regarding the swap dealer’s compliance with the CEA and CFTC regulations.

In a statement supporting the enforcement action, Commissioner Christy Goldsmith Romero highlighted how compliance was ignored in this situation. “Despite BNP compliance personnel flagging a swap reporting issue, BNP did not adequately and timely address the issue apparently due to concerns that a comprehensive fix would take significant time and resources,” she stated.

According to the CFTC order, from 2016 through at least 2021, BNPP “underreported at least 123,315 swaps and overreported at least 261,643 swaps,” the CFTC order stated. “Because swap transactions persist over time, and swap dealers normally make multiple reports regarding each reportable swap transaction, there were during this period more than 500,000 reports that should have been made, but were not made, in connection with the 123,315 underreported transactions.”

The specific causes of BNPP’s failure to report swap transactions that should have been reported included “failure to report more than 6,000 swap transactions with U.S. persons, because the counterparties had been incorrectly classified as non-U.S. persons,” the CFTC report stated. As a result, BNPP failed to make more than 300,000 reports relating to these transactions.

BNPP also violated the CEA and CFTC regulations by entering into more than three million swap transactions that were incorrectly reported “because BNPP failed to include in its reports for these transactions a required field indicating whether or not the transaction was with a non-swap dealer financial entity,” the CFTC order stated. “This data field is an important one for assessing swap dealers’ regulatory compliance.”

From 2016 to 2018, instead of correctly reporting bunched trades as allocations of trades, BNPP reported these transactions as new trades, according to the CFTC order. Additionally, from 2016 to 2020, BNPP incorrectly reported approximately 3,000 transactions as equity trades rather than commodity trades.

From 2016 to 2017, BNPP further violated CEA and CFTC regulations by adjusting daily mark disclosures for 82 swap transactions, “which resulted in approximately 19,000 adjusted daily mark disclosures being made to the relevant swap counterparties,” the CFTC stated.

‘Substantial Cooperation’
In reaching a settlement with BNPP, the CFTC recognized BNPP’s “substantial cooperation” during the Division of Enforcement’s investigation of this matter, which it said it recognized in the form of a “substantially reduced civil monetary penalty.”

In a statement, CFTC Commissioner Caroline Pham expressed concern that the settlement “ultimately is a missed opportunity for the Commission to fully enforce a culture of compliance and management accountability.”

“The Commission’s decision not to require a senior officer of the swap dealer, in addition to the chief compliance officer, to sign the written consent order report on remediation status and any ongoing material non-compliance issues suggests that the Commission does not take management accountability seriously,” Commissioner Pham stated.

“Management accountability is essential to ensuring that compliance with CFTC regulations is a priority and that there are sufficient resources dedicated to the swap dealer compliance program,” she said. “It is the business and management, not the compliance department, who are the first line of defense.  I am disappointed that the Commission failed to send this strong message today, and my expectation is that we will not fail to do so again.”

J.P. Morgan Action
In the second action, the CFTC ordered J.P. Morgan to pay an $850,000 civil monetary penalty and to cease and desist from any further violations of the CEA or CFTC regulations, as charged.

In a statement expressing support for the enforcement action against JP Morgan, Commissioner Goldsmith Romero said she was “quite concerned by the duration and substantial nature of violations by JP Morgan.  I also note that JP Morgan has been the subject of several CFTC enforcement actions over the years, and the subject of many other federal agency enforcement actions.”

According to the CFTC order, from September 2015 to February 2020, J.P. Morgan failed to report approximately 2.1 million short-dated foreign exchange (FX) swap transactions, which represented roughly 51 percent of the total number of FX swaps J.P. Morgan executed during that same period.

“Short-dated FX swaps are transactions in which the parties exchange two currencies the day after execution and then reverse that exchange at a predetermined rate on the following business day,” the CFTC stated.

“A short-dated FX swap is a reportable FX swap transaction because it involves an exchange of currencies and a reversal of that exchange on specific dates and at rates fixed at the inception of the contract. Consequently, J.P. Morgan was obligated to report its short-dated FX swaps under the relevant statutory and regulatory provisions, which it failed to do during the relevant period,” the CFTC stated.

J.P. Morgan represented to the CFTC it has reported all of the previously-unreported FX swaps transactions it was obligated to report.

“Timely and accurate reporting of swaps transactions by registered swaps dealers is critical to the CFTC’s mission to protect market participants and ensure market transparency and integrity,” said CFTC Acting Director of Enforcement Gretchen Lowe.

In both settlements, Commissioner Goldsmith Romero warned, “It has been more than 10 years since the Dodd-Frank Act swap data reporting rules have been in place.  It is far past time for swap dealers to come into compliance with the law.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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On June 2, the CFTC unanimously voted to release its request for information (RFI). CFTC Chairman Rostin Behnam stated, “The RFI will seek responses on questions specific to data, scenario analysis and stress testing, risk management, disclosure, product innovation, voluntary carbon markets, digital assets, greenwashing, financially vulnerable communities, and public-private partnerships and engagement.”

Commissioner Kristin Johnson stated, the RFI “reflects the CFTC’s established leadership in response to requests to better understand the role of voluntary carbon markets, as well as the agency’s commitment to ensuring a comprehensive effort to understand how our markets, market participants—including large and small agricultural and energy sector commercial and end users—may be impacted by physical risks or acute climate-related events and transition risks or the stresses that result from shifts in policies, regulations, customer preferences, and technology.”

According to the CFTC, the public comments will help to inform next steps to further the CFTC’s purpose to, “among other things, promote responsible innovation, ensure the financial integrity of all transactions subject to the Commodity Exchange Act (CEA), and avoid systemic risk.”

They’ll also help inform CFTC’s response to the recommendations of the Financial Stability Oversight Council 2021 Report on Climate-Related Financial Risk and inform the ongoing work of the Commission’s Climate Risk Unit.

Looking Forward
“The Commission may use this information to inform potential future actions including, but not limited to, issuing new or amended guidance, interpretations, policy statements, regulations, or other potential Commission action within its authority under the CEA, as well as its participation in any domestic or international for a,” the CFTC stated.

“With a growing number of companies making net-zero pledges, there is notable interest in carbon offset or sustainability products,” said CFTC Commissioner Christy Goldsmith Romero. “However, concerns about transparency, credibility, and greenwashing may hamper the integrity and growth of these markets.”

“I look forward to public input on whether there are customer protections, guardrails or standards that the Commission should consider as part of its mission to promote market integrity and transparency and to keep our markets free of fraud and manipulation,” Romero added.

The comment period will be open for 60 days following publication in the Federal Register. 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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