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Business News/ News / World/  SEC expands WhatsApp probe, gathers private messages from Wall Street: Report
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SEC expands WhatsApp probe, gathers private messages from Wall Street: Report

The US SEC is expanding its investigation into Wall Street's use of private messaging apps, gathering staff messages from over a dozen major investment firms. The investigation, which initially focused on broker-dealers, aims to identify potential violations of record-keeping regulations.

Securities and Exchange Commission. (File Photo)Premium
Securities and Exchange Commission. (File Photo)

The US securities regulator has expanded its investigation into Wall Street's utilization of private messaging apps, gathering numerous staff messages from over a dozen major investment firms, Reuters reported citing sources.

Earlier, the Securities and Exchange Commission (SEC) had requested these companies to conduct internal reviews of messages as part of its inquiry into Wall Street's use of unauthorized messaging apps like WhatsApp and Signal for work-related discussions.

The ongoing two-year investigation aimed at identifying potential violations of record-keeping regulations initially focused on broker-dealers, resulting in regulators imposing fines totaling over $2 billion.

Also Read: The SEC Wants To Spy On Your Portfolio

While Reuters and various other news outlets have covered the expansion of the SEC's investigation into "off-channel" communications to include investment advisers, the detailed examination of thousands of their staff messages had not been previously disclosed.

"It increases risk," one source said. "The more information you give the SEC, the more you fuel the beast."

In the most recent stage of the investigation involving over a dozen investment advisers, the SEC has, in recent months, sought messages from personal devices or apps used during the first half of 2021 for conversations related to business, as reported by insiders. The SEC's focus has extended to specific employees, including senior executives, with some cases involving as many as a dozen individuals.

The firms include Carlyle Group, Apollo Global Management, KKR & Co, TPG, and Blackstone, according to three people with direct knowledge of the matter, as well as some hedge funds, including Citadel, a source told Reuters.

Also Read: SEC’s Whistleblower Chief Manages Growing Pains as Program Gains Popularity

The executives gave their personal phones and other devices to their employers or lawyers to be copied, and messages discussing business have been handed to the SEC, three people told Reuters.

This approach differs from the investigations involving broker-dealers. In those instances, the SEC requested companies to internally review staff messages and provide a report to the agency indicating the number of messages related to work. In the broker-dealer investigations, SEC personnel reviewed only a portion of the messages, as confirmed by three sources familiar with those prior inquiries.

The sources spoke to Reuters on the condition of anonymity because SEC investigations are confidential.

Also Read: SEC Seeks More Disclosure From Smaller Banks in Wake of Failures

A minimum of 16 companies, which include Carlyle, Apollo, KKR, TPG, and Blackstone, have acknowledged that the SEC is investigating their communications. These firms refrained from offering additional information and declined to provide comments for this report. A representative for Citadel also chose not to comment.

Government investigations do not serve as proof of misconduct and may not always result in formal charges.

An SEC representative chose not to provide a statement. Chair Gary Gensler has supported the examination of communications, emphasizing the importance of record-keeping rules in assisting the SEC in preventing unlawful activities.

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"Now that they have all that data - it is very possible that the SEC will find compliance failures in there somewhere that have nothing to do with the off-channel communications record-keeping issues," said Jaclyn Grodin, a lawyer at Goulston & Storrs who is not involved in the investigation told Reuters.

“Private fund fees and expenses, conflicts of interest and preferential treatment of investors are issues the SEC is increasingly focusing on", she noted.

Reuters noted that the problem of keeping tabs on staff communications has dogged Wall Street compliance departments for years. Because companies do not surveil personal messaging channels, using them to discuss business puts SEC-regulated employers in breach of requirements to record all business communications.

The SEC's focus on Wall Street's record-keeping issues initiated when JPMorgan Chase, as part of a 2021 settlement, failed to furnish documents dating back to at least 2018 in connection with an unrelated investigation. In the settlement, JPMorgan Chase agreed to pay the SEC $125 million to settle charges related to deficiencies in record-keeping.

Suspecting that off-channel chat about deals, trades and other business was rife on Wall Street, the SEC in 2021 opened an inquiry into other broker-dealers' communications, said two sources. The misconduct proved so pervasive that the agency has been "shooting fish in a barrel," one said.

The investigation is becoming Chairman Gary Gensler's prominent enforcement effort concerning Wall Street, resulting in the inclusion of several major institutions such as Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley.

It has generated millions in fees for attorneys, with firms hiring dozens of lawyers to represent both the company and executives worried about their exposure, Reuters reported citing several sources.

Also Read: US SEC chief Gary Gensler raises concern of financial crisis due to AI: Report

As reported by Reuters, the SEC commenced its engagement with investment advisers in October 2022. Similar to its approach with broker-dealers, the SEC initially inquired about the record-keeping procedures of investment advisers. Subsequently, the agency pinpointed a set of executives and requested that these firms investigate their devices and provide feedback on the discovered information.

But the firms resisted, arguing their record-keeping requirements are narrower than broker-dealers'.

In a January letter led by the Managed Funds Association, the industry said the SEC's request was "invasive" and raised privacy issues. Bloomberg previously reported the letter.

Also Read: SEC sues US leading crypto platform Coinbase for violating securities rules; details here

The SEC later demanded that the investment advisers hand over the messages, the sources told Reuters.

The agency is ignoring important differences in investment advisers' recordkeeping requirements, said Jennifer Han, the MFA's executive vice president and chief counsel.

"Unilaterally expanding the rules by enforcement actions sidesteps due process and creates a dangerous precedent," she said in a statement.

(With inputs from Reuters)

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Published: 26 Sep 2023, 08:52 AM IST
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