SEC Intensifies Probe of Wall Street’s Use of Messaging Apps

Regulatory Insights | Sep 25, 2023

Image: Unsplash/Matam Jaswanth

The U.S. Securities and Exchange Commission (SEC) has intensified its investigation into Wall Street’s use of private messaging applications, including popular platforms like WhatsApp and Signal. This move has raised eyebrows in the financial sector, and here’s a breakdown of the situation.

The digital age has brought about a plethora of communication tools, with messaging apps like WhatsApp taking center stage. However, the convenience they offer has also led to regulatory concerns, especially within the financial sector.

A Hefty Price for Non-Compliance in the U.S.

Recently, the SEC fined 11 brokerage firms and investment advisers for failing to monitor and preserve employees’ messages on these platforms. Major financial institutions like Wells Fargo, BNP Paribas, Société Générale, and Bank of Montreal faced the brunt of these penalties who agreed to pay a staggering $549 million in fines.  The SEC’s focus is on ensuring that all business communications are recorded, as mandated by their regulations and has recently required Wall Street banks to review the personal phones of top traders and executives to determine the frequency of using these platforms for business.   This has all been part of a a two-year crackdown into potential breaches of record-keeping rules initially targeted broker dealers, netting regulators over $2 billion in fines.

What’s New? 

However, the scope of the investigation has now expanded to include investment advisers.  The SEC has recently collected thousands of staff messages from over a dozen major investment companies. This marks a significant escalation in the investigation, as previously, companies were only asked to review these messages internally. Now, the SEC is directly scrutinizing these communications, potentially exposing companies and their executives to increased regulatory scrutiny.  Prominent firms such as Carlyle Group, Apollo Global Management, KKR & Co, TPG, and Blackstone are among those under the SEC’s lens. Additionally, some hedge funds, including Citadel, are also part of the probe.

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The financial industry has voiced concerns over the SEC’s approach. In a letter led by the Managed Funds Association earlier this year, the industry highlighted the “invasive” nature of the SEC’s requests and raised privacy issues. Jennifer Han, the MFA’s executive vice president and chief counsel, emphasized the importance of due process and expressed concerns over the SEC’s unilateral expansion of rules through enforcement actions.

Is This Happening in Other Jurisdictions?

The UK’s Prudential Regulation Authority (PRA) has been proactive in ensuring that financial firms adhere to stringent record-keeping standards, especially concerning electronic communications. A LeapXpert article sheds light on the PRA’s stance on WhatsApp messaging. The regulatory body mandates companies to capture and save all business-related WhatsApp messages, monitor message exchanges for inappropriate behavior, and safeguard the confidentiality of these messages. The UK Financial Conduct Authority (FCA) has also been sending information requests to firms regarding the use of private messaging apps, emphasizing the need for auditable records.

Germany’s Federal Financial Supervisory Authority (BaFin) is reportedly conducting an investigation similar to the SEC‘s, focusing on the use of ephemeral messaging platforms at financial institutions. BaFin aims to determine the extent to which bankers in Germany are using these platforms for business communications.

And in Canada?:  According to a Blakes bulletin, the new Self Regulatory Organization (SRO), soon to be called the Canadian Investment Regulatory Organization (CIRO), requires Canadian Dealer Members to maintain complete and accurate records of client communications for at least seven years. This includes electronic communications. Dealer Members must also supervise their employees to ensure compliance with the rules. Unauthorized use of communication applications like WhatsApp, Signal, or text messages is contrary to the Standards of Conduct.

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While Canadian securities regulators are aware of the pervasive use of off-channel messaging apps, they have yet to impose large fines solely for unauthorized communications. However, some have started adding unauthorized communication contraventions to other allegations of wrongdoing. Canadian firms are advised to review their policies surrounding messaging applications and digital record-keeping proactively.

Conclusion

The world is becoming increasingly interconnected, and as technology evolves, so do the challenges it presents. Financial institutions, regulators, and messaging platforms must collaborate to strike a balance between convenience and compliance.

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada’s Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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• Source: https://ncfacanada.org/sec-intensifies-probe-of-wall-streets-use-of-messaging-apps/