The U.S. Securities and Exchange Commission (SEC) has intensified its investigation into Wall Street's use of private messaging apps, including popular platforms like WhatsApp and Signal. This move comes as the regulatory body seeks to ensure compliance with record-keeping requirements and to address potential misconduct.
The probe, which began two years ago, initially targeted broker-dealers and resulted in over $2 billion in fines. However, in October 2022, the scope of the investigation expanded to encompass investment advisers. The SEC's current focus is on more than a dozen major investment companies, including prominent names such as Carlyle Group, Apollo Global Management, KKR & Co, TPG, and Blackstone. Hedge funds, including Citadel, are also under scrutiny.
According to reports, the SEC has been collecting thousands of staff messages from these firms, specifically those that discuss business matters. This collection process has involved employees, including senior executives, handing over their personal devices to either their employers or legal representatives. The devices are then copied, and relevant business-related messages are forwarded to the SEC for review.
The depth and breadth of the SEC's demands have raised eyebrows in the investment community. Earlier this year, industry representatives, led by the Managed Funds Association (MFA), described the SEC's request for personal messages as "invasive." Jennifer Han, MFA's executive vice president and chief counsel, went on record stating that the SEC's approach sets a "dangerous precedent." She argued that the regulator seems to be expanding rules through enforcement actions.
The crux of the issue lies in the record-keeping requirements. Wall Street firms are mandated to record all business communications. However, many companies do not monitor their staff's personal messaging channels. When employees use these personal channels to discuss business, it puts the firms in violation of the record-keeping rules. The SEC's probe into broker-dealers revealed that such misconduct was widespread, likened to "shooting fish in a barrel."
The direct examination of these messages by the SEC poses additional risks for the firms under investigation. There's a possibility that the regulatory body might uncover other compliance failures unrelated to the primary issue of off-channel communications.
In a recent development, the SEC announced fines totaling $289 million against 10 broker-dealers for failing to keep records of business discussions that took place on personal messaging apps.