With an ever-expanding range of employee-favored messaging apps, Wall Street firms are facing a problem that is growing more difficult by the day: how to capture staff communications as required by regulators.
The Securities and Exchange Commission (SEC) crackdown (of over $1.6 billion in fines imposed on some 40 firms in 2022 and 2023 according to a speech given last month by Gurbir Grewal, the SEC’s enforcement division chief) comes amidst enforcement of rules promulgated well before the technology in use was created and before the current era of non-stop texting. The plague of so-called off-channel communications, whereby employees use personal devices and banned apps to send business-related messages that rules say must be recorded is a recent phenomena.
With no definitive definition or clear guidance from regulators on what constitutes business communications today, off-channel communications remain an area fraught with risk for financial firms and their employees, compliance advisers said.
“The regulators burdened the lives not only of the brokerage firms, but of the executives for having to download, hold, produce, evaluate all of this information in a landscape where people text. It’s the way people communicate these days; that isn’t going to change,” Ghillaine Reid, a partner at law firm Troutman Pepper Hamilton Sanders who advises firms on securities investigations and enforcement, said at a panel last week at the New York City Bar Association’s Compliance Institute, according to the Wall Street Journal
The problem is compounded by the ubiquity of IM usage. With some 79% of adult UK internet users making use of WhatsApp, for example, many check it the first thing in the morning and the last thing at night, according to Ofcom data. In the US about 69% of Gen-Z respondents to a survey conducted by email management technology provider Edison Mail last year said they preferred to communicate through messaging apps, rather than through emails and other forms of communication, such as phone calls.
And in the UK, WhatsApp’s “encrypted private spaces with the possibility of disappearing messages”, which remains “hard to police” has provoked scrutiny of government officials who used it during Covid.
Additionally, texting all day in a variety of contexts and usages challenges the concept of employee monitoring and warrants SEC guidance to the industry as to what is considered a business communication. SEC enforcement division senior counsel Jaime Lynn Marinaro recently said that in general, “almost every broker-dealer likely has some form of off-channel communications,” and it is best for the firms to consider self-reporting to regulators before the SEC comes knocking on their doors.
To that effect Goldman Sachs in September fired several senior executives in its transaction banking unit after they used their personal phones to converse about work-related matters, violating the firm’s communication policy.
The proliferation of new communication tools also complicates financial firms’ efforts to comply. The pandemic ushered in wider adoption of a range of new communication methods by employees working from home, and these tools have remained popular as many employees continue to work remotely, at least part-time. Capturing all this off-channel potential business communication remains challenging.
Worker pushback also occurs as many firms are either forbidding the use of personal devices to communicate business matters or asking staff to install an app on their personal phones to collect messages for supervision, raising questions about data privacy and leading some employees to leave firms because they don’t want companies to have such access to their personal lives.
Outsize fines have meant that firms are now looking into broadening efforts to comply with the record-keeping rules. Before the large settlements of the past few years, firms would usually only surveil traders and front-office people, but now they are looking at firms’ entire staff to ensure no one is using unapproved channels to talk about business-related activities, with regulators wanting to see that tone from the top—and actions from the top—to indicate the seriousness of these violations, and to make sure there is a demand for compliance tools..
The crackdown and fines also occurs against a background of regulator mission creep. While the existing regulations covered broker-dealers, enforcement has morphed into charges also against investment advisors, swap dealers, large private equity (PE) firms, in early 2023 also major hedge funds (including Point72 and Citadel) and now added, broker-dealers and credit rating agencies.
As the SEC expands its regulatory focus beyond broker-dealers and investment advisors, all regulated entities should brace for more rigorous scrutiny on this issue. This trend is underscored in the SEC’s 2023 Examination Priorities, which pinpoint business-related communications as a key area of focus. It is therefore crucial for regulated entities to proactively assess, and enhance where necessary, their recordkeeping practices.
Raising the bar
As reported in Finextra, the escalation of this probe doesn’t just constitute additional companies being examined; the investigation process has also become more severe, with numerous sources reporting that the agency has now confiscated thousands of phones. Previously, businesses were asked to review employee handsets themselves. The new approach leaves them more open, with nowhere to hide and no control over how their findings are reported back.
The next round of fines landed in September as broker-dealers and investment advisers, including Interactive Brokers and William Blair & Co, received multi-million dollar levies for similar record-keeping violations. The search for an endgame looks premature. With the SEC posting record enforcement penalty figures.
The fix is in for incentivizing pro-active self-reporting and remediation. Wall Street can no longer complacently plead ignorance.
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