The SEC has collected thousands of staff messages from more than a dozen major investment companies, expanding its probe into financial services firms’ use use of private messaging apps, Reuters reported on Monday, referencing sources with direct knowledge of the matter.
The agency’s decision to review thousands of their staff messages showcases an escalation of its ongoing investigation into such firms’ use of WhatsApp, Signal and other unapproved messaging apps to discuss work.
In the latest phase of the probe of more than a dozen investment advisers, the SEC has in recent months asked for messages on personal devices or applications during the first half of 2021 that discuss business, the sources told Reuters. It has targeted a selection of employees, in some cases as many as a dozen, including senior executives.
Enforcement activity has revolved around broker-dealer and investment adviser firms, so the collection of these messages at these private equity behemoths serves as a warning to firms in other financial sectors to take the matter seriously as well.
The executives gave their personal phones and other devices to their employers or lawyers to be copied, and messages discussing business have been turned over to the SEC, three people said. This is different than in other cases involving a review staff messages in which the businesses themselves were responsible for reviewing them and reporting to the agency how many of the messages discussed work.
The SEC staff reviewed only a sample of messages themselves, according to three sources with knowledge of the previous investigations.
Now, private equity
The firms include Carlyle Group, Apollo Global Management, KKR & Co, TPG, and Blackstone, according to three people with direct knowledge of the matter who spoke to Reuters, as well as some hedge funds, including Citadel, said another Reuters source.
It is important to note that a government investigation of a business does not necessarily mean charges of any kind are going to be brought, and the four sources spoke to Reuters anonymously, since SEC investigations are confidential.
The firms did not provide further details and did not comment for this story, and a spokesperson for Citadel declined to comment to Reuters.
Enforcement activity has revolved around broker-dealer and investment adviser firms to date, so the collection of these messages at these new firms, including some private equity behemoths, serves as a warning to firms in other financial sectors to take the matter seriously as well.
But it also comes with worries about what other regulatory lapses could be found during the SEC’s examination of these records, as noted in the Reuters article.
“Now that they have all that data, it is very possible that the SEC will find compliance failures in there somewhere that have nothing to do with the off-channel communications record-keeping issues,” said Jaclyn Grodin, a lawyer at Goulston & Storrs who is not involved in the investigation, in comments to the news agency.
‘Shooting fish in a barrel’
Despite written policies telling them not to, employees at SEC-registered businesses have used messaging channels on their personal devices to discuss business — which often puts SEC-regulated employers in breach of requirements to record and preserve business communications.
The problems started in 2021 when the SEC said in its settlement order with JPMorgan Chase that the bank failed to provide documents from at least 2018 pertaining to an unrelated probe. In that case the firm agreed to pay the SEC $125m to resolve charges over such recordkeeping lapses. (See this GRIP article for a list and description of these cases involving off-channel communications.)
The SEC grew suspicious about the problem being a wide-ranging one on Wall Street – guessing that off-channel chat about deals, trades and other business was occurring – so the agency opened an inquiry that year into other broker-dealers’ communications, said two sources.
The misconduct proved so pervasive that the agency has been “shooting fish in a barrel,” one of the sources told Reuters.
The SEC began approaching investment advisers in October 2022, again, seeking details on investment advisers’ recordkeeping policies, the sources said. The SEC then identified a group of executives and asked the firms to search their devices and report back on what they found.
The investment advisory community and their related associations pushed back, saying investment advisers’ recordkeeping obligations were narrower than those of broker-dealers, but the SEC demanded that the investment advisers hand over the messages nevertheless, the Reuters sources said.
Implications
This latest investigation highlights (yet again) how concerned regulators are about the issue, and why companies can’t just wait until an enforcement action happens to them to change their approach to safeguarding and supervising such communications adequately.
And it’s another reminder of the difficult conversations compliance officers get to have – about not using personal devices, about using certain technology to help the business retain and track the messages, about being diligent about conversations – even when they seem pithy and routine, and about instituting incentives and disincentives when it comes to employees actually following corporate policies.
No business wants the SEC staff coming by and gathering up employee devices and going through these communications on their own, for reasons ranging from other possible infractions that could be found to the sheer loss of productivity that is involved when cooperation with the regulator is required.
But these probes are becoming a presumptive enforcement initiative at Chair Gary Gensler’s SEC – and at the Commodity Futures Trading Commission. And whether one sees them as enforcement gone awry or a valid reminder of the regulator’s mission to monitor the markets – they are not going away anytime soon.
