SEC collects Wall Street’s private messages as WhatsApp probe escalates. Four persons with firsthand knowledge of the situation stated that the U.S. securities regulator had gathered thousands of staff communications from more than a dozen significant investment firms as part of an expansion of its investigation into Wall Street’s use of private messaging applications.
Before now, the Securities and Exchange Commission (SEC) had requested that the businesses conduct an internal assessment of the communications as part of its probe into Wall Street’s use of WhatsApp, Signal, and other forbidden messaging services for business purposes.
The two-year investigation into alleged violations of record-keeping regulations first focused on broker-dealers and resulted in fines totaling more than $2 billion for regulators.
The SEC’s decision to investigate thousands of their staff texts has not previously been publicized, despite Reuters and other media outlets reporting that the investigation into “off-channel” communication had been extended to investment advisors. Bringing the executives’ and firms’ actions under SEC scrutiny escalates the probe and raises the stakes for all involved.
One source said that “it increases risk.” You “feed the beast” more by providing the SEC with additional information.
According to the sources, the SEC recently requested messages from individuals on personal devices or applications during the first half of 2021 that discuss business as part of the investigation against more than a dozen investment advisors. Senior executives and a small group of employees have been targeted, sometimes as many as twelve.
According to three people with direct knowledge of the situation, the companies in question include Carlyle Group (CG.O), Apollo Global Management (APO.N), KKR & Co (KKR.N), TPG (TPG.O), and Blackstone (BX.N), as well as several hedge funds, including Citadel, another person with direct knowledge of the situation added.
Three persons said that texts about business were sent to the SEC by the executives, who granted their bosses or attorneys access to their phones and other devices so they could copy them.
Contrast that with broker-dealer probes. In certain situations, the SEC requested businesses to evaluate staff messages and inform the organization of how many times work was addressed. According to three people familiar with the prior investigations, SEC personnel only personally evaluated a sampling of the texts.
Because SEC investigations are private, the sources spoke on the condition of anonymity.
At least 16 companies have revealed that the SEC is looking into their interactions, including Carlyle, Apollo, KKR, TPG, and Blackstone. The companies declined to comment on this story and offered no further information. Citadel’s spokesman declined to respond to questions.
Investigations by the government do not always result in charges and do not prove wrongdoing.
A SEC representative declined to comment. Gary Gensler, the chair, has justified the communications review, stating that record-keeping regulations are essential to aiding the SEC in preventing fraud.
Jaclyn Grodin, a lawyer at Goulston & Storrs who is not engaged in the inquiry, said that it is highly likely that the SEC will uncover compliance problems in there someplace that have nothing to do with the off-channel communications record-keeping difficulties.
She pointed out that the SEC is paying more attention to private fund fees and costs, conflicts of interest, and preferential treatment of investors.
THE SHOOTING FISH
Wall Street compliance teams have struggled for years with the issue of monitoring employee communications. Businesses do not monitor personal messaging platforms; therefore, using them to do business infringes on SEC-regulated employers’ need to record all business interactions.
According to a 2021 settlement in which the bank agreed to pay the SEC $125 million to resolve charges over record-keeping lapses, the SEC started to focus on Wall Street’s record-keeping issue when JPMorgan Chase (JPM.N) failed to provide documents from at least 2018 about an unrelated probe.
According to two individuals, the SEC launched an investigation into the communications of other broker-dealers in 2021 after developing suspicions that off-channel discussion regarding deals, trading, and other business was common on Wall Street. The CIA has been “shooting fish in a barrel,” according to one since the misbehavior has been so ubiquitous.
Wells Fargo (WFC.N), Bank of America (BAC.N), Goldman Sachs (GS.N), and Morgan Stanley are just a few of the notable companies that have been caught up in the investigation, which is quickly taking shape as Gensler’s flagship Wall Street enforcement program.
According to multiple sources, it has brought in millions of dollars in fees for lawyers, and businesses have hired hundreds of attorneys to protect the company and executives concerned about their exposure.
‘INVASIVE’
Reuters earlier reported that the SEC started contacting investment advisors in October 2022. Like broker-dealers, the SEC first requested information on the record-keeping procedures of investment advisors. The businesses were then instructed to search a certain set of executives’ devices and report on what they discovered.
However, the companies protested, claiming that their record-keeping specifications were more stringent than those of broker-dealers.
The sector called the SEC’s request “invasive” and voiced privacy concerns in a letter published in January under the auspices of the Managed Funds Association. Bloomberg first covered the letter.
The sources said that the SEC later had the financial advisers turn over the texts.
Jennifer Han, executive vice president and general counsel for the MFA, said that the agency disregards significant variations in the record-keeping standards for investment advisers.
In a statement, she warned that unilaterally extending the law through enforcement operations “sidesteps due process and establishes a dangerous precedent.”
