SEC Reaps Nearly $100 Million in Penalties From Financial Service Firms

SEC HQs 2The SEC Enforcement Division appears to be picking up in Fiscal Year 2017 where it left off last fiscal year, as the agency continues to obtain large penalties in settled actions against financial institutions. Last week, Credit Suisse AG agreed to pay a $90 million penalty to settle charges that it misrepresented how it determined a key performance metric of its wealth management business. In addition to the size of the penalty, this case is noteworthy because Credit Suisse AG admitted wrongdoing.

This week, Deutsche Bank Securities agreed to pay a $9.5 million penalty for improper handling of material nonpublic information generated by its research analysts. The firm also allegedly published an improper research report and failed to properly preserve and provide certain electronic records during the SEC investigation.

Credit Suisse Charges

The Credit Suisse case arose from the firm’s methodology for determining net new assets (NNA). NNA, which represents the net of the total inflow of client assets after subtracting the outflow of client assets, is a valuable metric for investors in assessing the ability of financial institutions to attract new business. Credit Suisse disclosed in its securities filings that the firm individually assessed assets based on each client’s intentions and objectives. The SEC charged, however, that the firm took an undisclosed results-driven approach to determining NNA in order to meet certain targets established by senior management.

Credit Suisse divided client assets into two categories, assets under management (AUM) and assets under custody (AUC). Assets classified as AUM typically generated higher profit margins for the firm due to fees charged for financial advice and asset management services, than did AUC, which were assets held solely for transaction-related reasons or for safekeeping and custody purposes. The SEC charged that Credit Suisse AG improperly misclassified billions of dollars of assets it held in its role as a custodian as AUM.

The SEC claimed that Rolf Bögli, who formerly served as the firm's chief operating officer, pressured other Credit Suisse employees to classify certain client assets as AUM. Without admitting or denying the SEC findings, Bögli agreed to pay an $80,000 penalty.

Deutsche Bank Securities Settlement

The SEC alleged that Deutsche Bank encouraged its research analysts to communicate frequently with customers as well as its own sales and trading personnel. The firm, however, allegedly lacked adequate policies and procedures to prevent these analysts from disclosing yet-to-be-published views and analyses, changes in estimates and short-term trade recommendations.

In addition, the SEC claimed that the firm improperly published a research report created by a former analyst that rated the shares of Big Lots, Inc. as a “Buy.” The analyst, Charles P. Grom, certified in accordance with Regulation AC that the recommendation reflected his personal views. Despite this certification, he told the firm’s sales and trading staff that he wanted to, but did not, downgrade Big Lots in order to maintain his relationship with its management.

Finally, during the SEC investigation, the firm discovered a problem with the software responsible for preserving required electronic communications. The firm was able to recover a substantial amount of the communications in question, but could not represent that it had recovered all requested information. Accordingly, the firm violated the records maintenance rules and the requirement to promptly furnish copies of the specified communications to the staff.

Deutsche Bank Securities agreed to pay a $9.5 million penalty without admitting or denying wrongdoing.

In the Matter of Deutsche Bank Securities Inc., SEC Release No. 34-79083 (Oct. 12, 2016); In the Matter of Credit Suisse AG, SEC Release No. 33-10229 (Oct. 5, 2016).

Read more about the SEC’s record enforcement year in fiscal year 2016: More Stand-Alone Cases Lead to SEC’s Record Enforcement Year.