SEC and DOJ Mobile Compliance Enforcement Sparks New Concerns

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Several major private-equity firms on Wall Street have revealed they are in settlement talks with the U.S. Securities and Exchange Commission (SEC) regarding the use of prohibited communication channels by their employees, according to the WSJ. Blackstone, TPG, and Carlyle Group announced in their recent quarterly filings that they have been cooperating with the SEC’s record-keeping investigations and are discussing potential resolutions with the agency’s enforcement staff.

SEC regulations require financial firms to preserve and monitor their employees’ written communications to ensure compliance with federal laws. Firms risk violating these rules if they fail to retain or monitor business-related messages exchanged over banned mobile apps such as WhatsApp, particularly when these communications occur on employees’ personal devices.

In October 2022, the three firms received requests for information regarding the retention of electronic business communications, including text messages, as part of an industrywide sweep. They subsequently disclosed these investigations in their securities filings, as reported by The Wall Street Journal. An SEC spokesperson declined to comment on the existence or nonexistence of any investigation, and spokespeople for Blackstone, Carlyle, and TPG also declined to comment.

Latest quarterly fine set-asides still include contingencies

Blackstone’s latest quarterly report, filed in early May, noted an accrual for estimated liabilities related to this matter. Similarly, TPG’s May filing included a contingent liability for the period ending March 31. However, the filings do not specify the amounts set aside for potential settlements. Carlyle’s May 7 filing indicated that the SEC has been examining its retention of business communications via text and messaging apps like WhatsApp and WeChat, adding that there is no assurance a settlement will be reached.

Other private-equity firms have also disclosed similar probes. KKR’s latest quarterly report confirms its cooperation with the SEC’s record-keeping investigations. Apollo’s filing indicates that some of its investment adviser subsidiaries have received SEC requests for information and documents related to the investigation. Spokespeople for KKR and Apollo declined to comment to the WSJ beyond their filings.

These disclosures occur amid a broader regulatory crackdown on off-channel communications. Since December 2021, the SEC has charged 60 firms and imposed fines of some $1.8 billion for failures in maintaining and preserving electronic communications, according to a senior enforcement official. The enforcement has expanded from major banks and broker-dealers to other financial entities, including credit-rating firms. In February, the SEC fined additional brokerages for using messaging apps that violated record-keeping rules. Gurbir Grewal, director of the SEC’s enforcement division, noted last year that the substantial fines for record-keeping violations have prompted policy and procedural changes within firms.

Compliance Enforcement Using Whistleblowers Continues Gaining Traction

Alas, whistleblowing as the preferred means of compliance enforcement continues to gain traction in both the US and abroad, with more regulators and agencies worldwide recognizing the benefits of paying individuals for valuable information. This marks a shift in the ongoing debate.

In recent years, regulators both in the U.S. and internationally have adopted or are considering establishing their own cash-for-tips programs, as these initiatives in the U.S. become a standard component of enforcement strategies.

In early March, the U.S. Justice Department announced a pilot program to pay whistleblowers who provide information about corporate crime, offering a new incentive to attract more tipsters to support government enforcement efforts. Similarly, lawmakers have proposed a whistleblower award program for the Consumer Financial Protection Bureau.

In the U.K., the Serious Fraud Office, which investigates white-collar crime, has also indicated it will explore the establishment of a whistleblower reward program under its new director.

The U.S. Securities and Exchange Commission received 18,354 tips and awarded nearly $600 million in fiscal year 2023, marking the highest annual amount in the program’s history. An SEC spokesman reported that the agency has distributed $35.8 million to whistleblowers so far this fiscal year, which ends on September 30. The U.S. Commodity Futures Trading Commission received 1,530 whistleblower tips and awarded nearly $16 million in fiscal year 2023.

There are still holdouts on the issue. Regulators in the European Union encourage whistleblowing but remain hesitant to offer monetary rewards for information. In Germany, there is often discomfort with the concept of whistleblowing.

Observers believe that the Justice Department initiated the pilot program partly due to the significant value whistleblowers have added to enforcement cases, evidenced by the number of referrals from the SEC and CFTC, according to Christina McGlosson, the former acting director of the CFTC’s whistleblower program and now a special counsel at Cohen Milstein Sellers & Toll told the WSJ. She noted that whistleblower tips accounted for one-third of all active CFTC enforcement investigations in fiscal year 2023.

Meanwhile, Grewal of the SEC in a recent presentation at a Securities Enforcement Forum reminded his audience of the advantages to cooperating, self-reporting and whistleblowing, according to the following principles:

  • The best cooperation starts early and well before the SEC gets involved, with self-policing.
  • Once you discover a possible violation, self-report without delay.
  • Don’t stop with the self-report. Remediate.
  • The type of cooperation that earns credit requires going above and beyond what’s legally required — more than simply complying with subpoenas without undue delay or gamesmanship.
  • Collaborate with Enforcement Staff early, often, and substantively.

Criminalizing Defense Counsel Behavior

In recent months, the Antitrust Division of the U.S. Department of Justice has issued increasingly severe warnings to companies and executives about the consequences of not preserving ephemeral messages and those sent using collaboration tools.

This policy aligns with the recent stance of the Criminal Division, but with a significant distinction: the DOJ Antitrust Division has escalated the matter by threatening to prosecute defense and in-house counsel for obstruction of justice if their actions lead to the deletion of relevant materials required by a grand jury subpoena.

Across the country, high-level officials from the DOJ Antitrust Division have been conveying this message to counsel through public statements.

Manish Kumar, deputy assistant attorney general for criminal enforcement at the DOJ Antitrust Division, stated:

“The Antitrust Division and the Federal Trade Commission expect that opposing counsel will preserve and produce any and all responsive documents, including data from ephemeral messaging applications designed to hide evidence. Failure to produce such documents may result in obstruction of justice charges.”

RIA Targeting to Continue

The April $6.5 million Senvest Management settlement represents a continuation in SEC recordkeeping violation enforcement, against a standalone RIA, which began in October, 2023. With this settlement now public, we anticipate the SEC will continue to scrutinize RIA electronic communications practices in both examinations and enforcement investigations.

Santander Prohibits WhatsApp From Spanish Investment Bank Phones

Banco Santander SA has removed popular messaging apps, including WhatsApp, from company-issued smartphones used by its investment bankers in Spain, reflecting a broader effort by banks to tighten control over staff communications.

According to sources familiar with the matter, the Spanish lender recently instructed investment banking staff at its Madrid headquarters to delete any unauthorized messaging software from their devices.

Despite a prior ban on such software, some employees had retained these apps on their phones, raising concerns about potential continued use. This led the bank to take further action, the sources said, requesting anonymity due to the private nature of the information.

About TeleMessage

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