by PAUL J DAVIES 

WHEN Gary Gensler, chair of the US Securities and Exchanges Commission (SEC), handed out huge fines to Wall Street dealers for failing to record WhatsApp and other messages on Tuesday, he admonished them solemnly: “Finance, ultimately, depends on trust,” he said. 

Except, well, it really doesn’t — and hasn’t for a long time. This is why every aspect of what brokers and traders do each day across the financial world is regulated within an inch of its life. 

It’s also why all communication about business between traders, bankers, investors and executives has to be recorded and kept for years. 

The total absence of trust is why every large bank that matters on Wall Street, plus Jefferies Group LLC, Nomura Holdings Inc and Cantor Fitzgerald & Co, has now been fined more than US$2 billion (RM9.27 billion) in total by the SEC and Commodity Futures Trading Commission (CFTC) for not recording messages properly — and in some cases deliberately deleting them. 

Bank executives might chuckle at the irony if hadn’t cost them so dearly. But the industry is its own worst enemy: Financial regulation is so complex and detailed because individuals and institutions are always finding new ways to do bad or stupid things. 

There was evidence of both from the SEC and CFTC. The head of one trading desk at Bank of America Corp (BofA), for example, instructed traders to move their group chat from traditional text messages to WhatsApp and later to Signal, according to the CFTC’s order. 

The desk head also instructed the team and brokers at a third party to delete all their messages. 

This is straightforwardly bad. There’s no suggestion in the orders that the desk was doing wrong in its trading activity, but hiding your communications is never a good look. For the regulators, the big problem is that the lack of details about who negotiated what trades and why can hamper investigations later on if something goes wrong or someone appears to have been harmed. 

Several of the banks were reprimanded by the SEC because senior staff responsible for over-seeing bankers’ compliance with communications and recordkeeping policies were themselves regularly sending DMs from their own phones about their banks’ business. 

This is face-palm plain dumb. It’s like your expenses manager binning your receipts and saying: Meh, who cares? 

Rules on recordkeeping to ensure people behave themselves have been part of US securities law since 1934. The problem of adhering to them isn’t new, but it has grown with how easy it has become to communicate through our ever-present smartphones. 

I personally use three messaging apps, ordinary SMS texts and DMs through Twitter and Instagram — and many would probably see that as lightweight. 

Finance and markets are social phenomena. They happen between people. It used to be that those people had to meet in person to transact on the floor of some grand exchange. Then Covid-19 showed that Wall Street can be run from kitchen tables, summer houses and lofts. 

The sprawling communication has led lenders and others into bad habits from the regulators’ point of view. Most of the big banks have been fined US$200 million each — the sort of penalty normally associated with actual fraud or investor harm — because the authorities want to shock them. 

The headache for banks is how to stay on top of things. 

There are some technical solutions; for example, the firm Symphony Communication is selling a product that can pull WhatsApp and WeChat into the same monitored interface and is working on adding Line, Signal and Telegram. 

All the data generated by these different forms of communication also needs to be stored somewhere, which adds to the costs and computing needs for banks, too. (Bloomberg LP, the parent company of Bloomberg News, also provides multi-channel communications surveillance and archiving software solutions, including for capturing WhatsApp, text messaging and other mobile channels.) 

Banks and other financial firms can also make it easier for staff to communicate quickly while following the rules. 

They need to be absolutely clear with employees about their policies and the punishments for failing to follow them — the latter of which should be enforced. The SEC is demanding that the banks get employees to certify in writing every quarter that they are complying with recordkeeping requirements. What was that about trust again?

Of course, it will still be difficult to stop determined bad actors: If someone sets out to rob people, then no recordkeeping policy is going to make much difference. Even having staff fully aware that their communications are recorded hasn’t been a barrier to traders and bankers doing dubious or idiotic things. 

Every major probe of financial wrongdoing of the past 15 years or so has been delivered with a trove of damning and often laughable quotes from chat rooms, emails and text messages. 

What the latest fines really tell us is that the costs of monitoring, supervising and auditing modern finance are ever-growing. 

And that finance is in no way a trust-based industry at all. — Bloomberg 

• This article first appeared in The Malaysian Reserve weekly print edition.