The surge in inflation isn’t sparing Wall Street, especially when it comes to regulatory settlements. Big banks and brokerage firms are now shelling out more significant amounts to settle regulatory investigations, even those not directly tied to investor losses.
U.S. market regulators increasingly demand tens of millions of dollars to pay for technical violations, a stark shift from just a few years ago when such resolutions were relatively cheaper.
The Securities and Exchange Commission (SEC) recently filed a lawsuit against Virtu Financial, a major player in electronic trading on Wall Street. The SEC alleged that certain employees might have accessed the firm’s clients’ confidential trading information inappropriately.
It’s important to note that the SEC didn’t accuse Virtu of misusing this data. The lawsuit highlighted regulators’ challenges in determining whether the wrong individuals accessed nonpublic records.
Typically, the SEC settles most of its enforcement cases, and Wall Street firms prefer paying fines to avoid litigation that could spotlight their executives. However, under Chair Gary Gensler’s leadership, the SEC is pursuing higher settlement fines, surpassing previous penalties even for similar violations.
In Virtu’s case, the SEC sought a fine exceeding $25 million, a substantial increase from what similar prior topics garnered. This fine would have constituted about 5% of Virtu’s net income for the previous year.
Virtu’s Chief Executive, Douglas Cifu, publicly disagreed with the SEC’s settling offers, deeming them non-commercial. Consequently, he chose to contest the regulator in court. Cifu has clashed with Gensler over the SEC’s moves to alter how retail traders’ stock orders are processed.
He also labeled the SEC’s lawsuit politically motivated, indicating the tensions between the regulatory body and certain industry players.
SEC Enforcement Director Gurbir Grewal also raised the issue of penalties for misrepresenting investor-protection policies.
He emphasized the need to set penalties at a level where the cost of fostering a culture of compliance within an organization outweighs the cost of violating federal securities laws.
While many support Gensler’s stricter approach, they urge the SEC to target individuals in their enforcement actions.
Dennis Kelleher, President of Better Markets, stated that while significant fines are essential, imposing them solely on big banks often means shareholders bear the brunt, with little effect on deterring illegal activities by bankers.
Banks whose brokers and traders used banned messaging tools like WhatsApp have faced some of the most significant fines under the Biden administration.
These probes aimed to curtail traders from discussing business matters on apps not monitored by banks’ compliance departments. Notably, the SEC has not sued individuals or alleged that these communications were intended to conceal misconduct.
