SEC Expanding Communication Compliance Enforcement from Broker Dealers to Investment Advisors

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In late September, Reuters reported that U.S. regulators on Friday fined eight companies a total of $111 million over record-keeping lapses, the latest in a series of enforcement actions levied over Wall Street’s use of WhatsApp and other unapproved messaging channels for discussing business.

The Securities and Exchange Commission (SEC) said eight broker-dealers, investment advisers and ratings agencies, including Perella Weinberg, Interactive Brokers, Fifth Third Securities and Nuveen Securities, had agreed to pay a combined $91 million in penalties to the agency.

Interactive Brokers also agreed to pay the Commodity Futures Trading Commission $20 million to settle related charges.

Lawyers for the companies either did not immediately respond to requests for comment or declined to comment.

Reuters first reported earlier this week that the SEC was nearing a settlement with several Wall Street firms over record-keeping failures. The settlements mark the latest enforcement actions in the SEC’s two-year crackdown on Wall Street’s use of unapproved messaging apps, which has so far resulted in more than $2 billion in fines.

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 has said such records are critical for guarding against fraud and other misconduct.

“By failing to maintain and preserve required records, certain of the firms likely deprived the SEC of these off-channel communications in various SEC investigations,” the agency wrote.

The failures involved employees at different levels of authority, including supervisors and senior managers.

Credit rating agencies DBRS Inc. and Kroll Bond Rating Agency LLC agreed to pay $8 million and $4 million respectively.

Employees at both firms failed to preserve electronic communications, including off-channel messages on personal and work-issued devices, the SEC said. DBRS was also charged with violations related to the ratings of certain commercial mortgage-backed securities.

Robert W. Baird & Co and William Blair & Company also settled.

Expanding From Broker Dealers to Investment Advisors

The U.S. Securities and Exchange Commission’s scrutiny of how Wall Street handles work-related communications on personal devices and apps such as WhatsApp has expanded beyond broker-dealers to investment funds and advisers, according to four people familiar with the inquiry, according to Reuters.

Late last month, the SEC and the Commodity Futures Trading Commission (CFTC) fined 16 financial firms, including large banks such as Goldman Sachs Group Inc  and Morgan Stanley, a combined multi-million dollars after staff discussed deals and trades on their personal devices and apps, in a sweeping probe of record-keeping practices.

That probe mostly targeted broker-dealers rather than asset managers, but funds nevertheless did become more cautious as a result and joined banks in further restrictions on personal cellphones, as well as text messages and apps like WhatsApp.

The SEC’s enforcement unit has sent inquiries to a number of funds and investment advisers asking for information about their procedures and protocols for so-called “off-channel” business communications, the four sources told Reuters. The agency has asked firms to archive and produce documents and share information on policies related to the use of devices and platforms, the sources said, speaking on condition of anonymity. The SEC has been aggressively enforcing regulations under Democratic leadership.

The banks’ staff routinely communicated about business matters such as debt and equity deals with colleagues, clients and other third-party advisers using applications on their personal devices such as text messages and WhatsApp, the agencies said when it announced the resolution with the banks last month.

The institutions did not preserve most of those personal chats, violating federal rules which require broker-dealers and other financial institutions to preserve business communications. That impeded the agencies’ ability to oversee financial markets, ensure compliance with key rules, and gather evidence in other, unrelated investigations, the SEC and CFTC said.

Like broker-dealers, investment companies and registered investment advisers are required by the SEC to maintain records of business communications.

In response to the heightened regulatory overview, asset managers have been tightening controls on personal communication tools such as WhatsApp as they join banks in trying to ensure employees play by the rules when they do business with clients remotely.

Global regulators had already begun to clamp down on the use of unauthorized messaging tools to discuss potentially market-moving matters, but the issue gathered urgency when the coronavirus pandemic forced more finance staff to work from home in 2020.

These mobile messaging compliance enforcement actions occur against a larger Justice Department shifting emphasis towards voluntary self-disclosure policies. A top official of the Justice Department’s criminal division said earlier this year that it is seeing more companies voluntarily alerting prosecutors to instances of possible criminal wrongdoing in their companies after the department increased the rewards for doing so.

According to the WSJ, the Justice Department previously said that it was adding more than 25 new corporate crime prosecutors in its national security division, including a first-ever chief counsel for corporate enforcement for the division. The Justice Department is also increasing by 40% the number of prosecutors in the criminal division’s bank integrity unit.

FCA to follow SEC Mobile Communication Archiving Enforcement?

UK Compliance officers still await moves by the Financial Conduct Authority (FCA) to follow the SEC and make sure they can audit communications should market abuse occur. The FCA has discussed US regulators’ crackdown on authorised messaging apps with stateside peers, in a sign that the UK watchdog could be mulling its own probe into how traders use tools like WhatsApp. However, the City’s financial regulators have yet to clamp down on the practice, with off-channel communication increasingly common after staff and clients shifted online during the pandemic as reported in Financial News.

When put on the spotlight on the issue during a press conference after the FCA’s 4 October annual public meeting, the FCA executive director for markets and international Sarah Pritchard acknowledged the SEC’s most recent actions.

When asked whether the regulator would follow the SEC’s clampdown on WhatsApp and monitor bankers’ messages Pritchard, said “Where we know that action is taken by other regulatory authorities overseas we remain in contact with them because it’s important that where our firms operate cross-border we have those good supervisory relationships with our fellow international regulators.” .

Matt Smith, chief executive of market surveillance firm SteelEye, said: “The FCA’s statements mean market participants need to be on top of their record-keeping practices in multiple regions. The costs of fines and resourcing the work to source the information demanded by regulators are bad enough in one region. The smaller asset managers and hedge funds that are increasingly in scope will really struggle to explain away these costs to their boards and investors.

Relatedly, UK PM Rishi Sunak failed to provide WhatsApp messages  from his time as Chancellor during the pandemic to the Covid Inquiry Commission because he failed to back them up and that  he does “not have access” to the messages because he changed his phone several times, The Guardian claimed. The Sunak failure comes on top of predecessor Boris Johnson’s inability to retrieve messages from 31 January to 7 June 2020 inclusive.

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