SEC WhatsApp Probe delves into the personnel affairs of asset managers

SEC WhatsApp Probe delves into the personnel affairs of asset managers

The broad US investigation into the use of third-party messaging services such as WhatsApp in major banks is now sweeping over registrars at major investment firms.

The broad US investigation into the use of third-party messaging services such as WhatsApp in major banks is now sweeping over registrars at major investment firms.

The Securities and Exchange Commission has asked money managers to provide details of who in their companies oversees the maintenance of electronic communications, according to a request reviewed by Bloomberg News. The query is part of a letter the regulator recently sent to some of the biggest players in the industry for information about policies and key employees whose texts and emails should be archived.

The new focus on investment firms suggests that more sanctions are likely to follow after the Securities and Exchange Commission and the Commodity Futures Trading Commission fined banking giants including JPMorgan Chase & Co. Business.

“It shows that the SEC investigation goes well beyond the biggest brokers and dealers, and has the potential to extend to all corners of the financial services sector,” said Howard Fisher, partner at law firm Moses Singer. “With more and more financial professionals staying out of the office five days a week, and with the increasing use of informal means of communication, the potential scope of responsibility can be enormous.”

The Securities and Exchange Commission declined to comment.

Under SEC rules, money managers face less extensive record-keeping rules than brokerages, with retention focused on documents related to investment advice. However, like banks, investment firms have to monitor communications related to their business to avoid inappropriate behaviour.

The proliferation of mobile messaging apps has made this even more difficult. Compliance systems have come under further strain as employees have worked from home during the pandemic.

Imposing record fines on brokerages over the past year, the SEC has deemed bankers’ use of WhatsApp to conduct deals and arrange deals as much more than a simple record-keeping violation. The regulator said the use of uncertified devices means investigators can’t access the documents they need to conduct oversight and root out misconduct.

The agency’s growing interest in investment firms also carries risks for those firms’ executives. While the Securities and Exchange Commission stepped up its investigation of Wall Street banks, the regulator forced lenders to launch a systematic search through more than 100 personal cell phones carried by major traders and deal makers.

Discussing the matter due to its sensitivity, a person familiar with the query, who asked not to be identified, said dozens of investment firms have received the inquiries. It is not uncommon for an agency’s enforcement unit to send messages across the industry as investigators seek to gauge whether a particular practice is widespread. Such broad investigations may lead to investigations focused on the behavior of particular companies or persons.

Fischer, a partner of Moses Singer who previously served as a senior trial attorney for the SEC, added that inquiries will also likely lead to more compliance professionals being called upon from investment firms.

As part of its request, in addition to requiring companies to identify persons responsible for overseeing a company’s electronic communications policies, the SEC also requested details about reviews of policies and procedures, training programs and related disciplinary actions. The organizer also requested documentation on how his organization was set up and details of some of the larger business units.

John Morley, a professor at Yale Law School who focuses on the asset management industry, says the SEC’s interest in investment firm recordkeeping is a natural follow-up to its investigation of brokerages.

“This is further evidence of how the lines between banking and asset management continue to be blurred,” he said. “Banks and asset managers often work in the same areas of business, so they often raise the same legal issues.”

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