In a significant development, the US Securities and Exchange Commission (SEC) has intensified its investigation into Wall Street’s use of private messaging applications. According to four individuals with direct knowledge of the matter, the SEC has amassed thousands of staff messages from over a dozen major investment firms.
Previously, the SEC had instructed these companies to conduct internal reviews of messages as part of its inquiry into the use of unauthorized private messaging platforms such as WhatsApp and Signal for work-related discussions. This crackdown, spanning two years, initially targeted broker-dealers, resulting in over $2 billion in fines for regulatory authorities.
This move signifies a notable escalation of the investigation, placing higher stakes on the companies and implicated executives, as their conduct is now subject to SEC scrutiny.
“It increases risk,” one source cautioned. “The more information you give the SEC, the more you fuel the beast.”
During the latest phase of the investigation involving more than a dozen investment advisers, the SEC, in recent months, has sought messages exchanged on personal devices or applications in the first half of 2021 that pertain to business matters, according to insider sources. This effort specifically targets a selection of employees, including high-ranking executives.
Among the firms under scrutiny are industry heavyweights Carlyle Group, Apollo Global Management, KKR & Co, TPG, and Blackstone, as well as some hedge funds including Citadel, as confirmed by individuals familiar with the matter. Executives have complied by providing their personal phones and other devices to their employers or legal representatives for duplication, with messages discussing business subsequently furnished to the SEC.
This approach differs from the broker-dealer investigations, where the SEC instructed companies to review staff messages and report the number discussing work. In those instances, SEC staff personally examined only a sample of the messages, sources familiar with prior investigations revealed, all speaking on condition of anonymity due to the confidential nature of SEC inquiries.
An SEC spokesperson declined to comment on the matter. Chair Gary Gensler has defended the scrutiny of communications, emphasizing the critical role record-keeping rules play in enabling the SEC to safeguard against misconduct.
Legal experts, such as Jaclyn Grodin of Goulston & Storrs, have noted that with this wealth of data, the SEC may uncover compliance failures unrelated to off-channel communications record-keeping issues.
The SEC’s investigation focuses on a range of concerns, including private fund fees, conflicts of interest, and preferential treatment of investors. The perennial challenge of monitoring staff communications within Wall Street compliance departments stems from the inability to surveil personal messaging channels, thereby putting SEC-regulated employers in violation of the requirement to document all business-related communications.
The SEC’s attention to Wall Street’s record-keeping lapses began when JPMorgan Chase failed to produce documents from 2018 for an unrelated investigation, culminating in a $125 million settlement in 2021. This incident prompted the SEC to delve into the broader issue of broker-dealers’ communications, leading to the ongoing probe.
As of October 2022, the SEC initiated contact with investment advisers. Initially, the agency sought information on their record-keeping policies, later narrowing its focus to a group of executives and requesting the firms to conduct searches on their devices. Faced with resistance, the SEC insisted on access to the messages, sources revealed.
Jennifer Han, Executive Vice President and Chief Counsel of the Managed Funds Association, contended that the SEC was overlooking critical distinctions in investment advisers’ record-keeping obligations, warning that unilateral rule expansion through enforcement actions sets a concerning precedent.
It is important to note that government investigations do not constitute proof of wrongdoing and may not necessarily result in charges. The SEC’s ongoing scrutiny has led to at least 16 firms publicly acknowledging that their communications are under investigation, prompting concerns about potential privacy breaches. Chair Gary Gensler’s vigorous pursuit of this investigation indicates that it is poised to become a hallmark initiative in Wall Street enforcement, already ensnaring major players like Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley. This inquiry has generated substantial legal fees, with firms engaging scores of lawyers to represent both the companies and apprehensive executives.
Source: Bloomberg
