SEC scrutiny into Wall Street communications shifts to investment funds – sources

By Chris Prentice

WASHINGTON (Reuters) -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.

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 (NYSE:) and Morgan Stanley (NYSE:), a combined $1.8 billion after staff discussed deals and trades on their personal devices and apps, in a sweeping probe of record-keeping practices.

That probe primarily targeted broker-dealers rather than asset managers, although funds did become more cautious as a result and joined banks in tightening controls on personal cellphones, as well as text messages and apps such as WhatsApp.

The SEC’s enforcement unit has sent inquiries to a number of funds and advisers asking for information about their protocols for so-called “off-channel” business communications as recently as last week, the four sources told Reuters. The agency has asked firms to preserve 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 regulatory agency has also asked for details on the firms’ organizational charts and past violations and remediation efforts, two of the sources said.

Details of the investigative “sweep” have not previously been reported. A spokesperson for the SEC declined to comment, saying: “We don’t comment on the existence or nonexistence of a possible investigation.”

The SEC periodically conducts such sweeps to quickly gather information on issues it suspects may be widespread. Sweeps can sometimes, although not necessarily, lead to formal probes.

The SEC has been aggressive on enforcement under Democratic leadership and the industry probe into the banks was a landmark case for the SEC and the Commodity Futures Trading Commission, marking one their largest collective resolutions.

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 agencies 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 scrutiny, 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.

Keeping up with a proliferation of communication apps — especially during the pandemic – has been a challenge for many companies.

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.

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