SEC WhatsApp Probe Digs Deeper Into Asset Managers' Personnel

The broad US probe into the use of outside messaging services like WhatsApp at major banks is now sweeping in recordkeepers at big investment firms.

The Securities and Exchange Commission has asked money managers for details on who at their firms oversees retention of electronic communications, according to the request reviewed by Bloomberg News. The query is part of a letter that the regulator sent recently to some of the largest players in the industry seeking information on policies and key staff whose texts and emails are supposed to be archived.

The fresh focus on investment firms signals that more penalties will likely follow after the SEC and the Commodity Futures Trading Commission fined banking giants including JPMorgan Chase & Co. and Bank of America Corp. about $2 billion for their employees using outside messaging platforms to conduct official business.

“It shows that the SEC’s probe goes beyond the largest broker-dealers and that it will likely extend to all corners of the financial services sector,” said Howard Fischer, a partner at law firm Moses Singer. “With more and more financial sector workers still not in the office five days a week, and with the increased use of non-official means of communication, the potential scope for liability can be tremendous.”

The SEC declined to comment.

Under SEC rules, money managers face less expansive recordkeeping rules than brokerages, with retention focused on documents related to investment advice. However, like banks, investment firms are required to monitor communications involving their business to head off improper conduct.

The proliferation of mobile-messaging apps has made that more challenging. Compliance systems were strained further as employees worked from home during the pandemic.

In bringing record fines against brokerages over the past year, the SEC deemed bankers’ use of WhatsApp to cut deals and arrange trades as much more than a simple recordkeeping violation. The use of unapproved devices, the regulator said, means that investigators can’t get access to documents they need to conduct oversight and root out misconduct.

The agency’s expanding interest into investment firms also carries risks for executives at those companies. As the SEC ratcheted up its probe into Wall Street banks, the regulator forced lenders to embark on a systematic search through more than 100 personal mobile phones carried by top traders and dealmakers.

Dozens of investment firms have received the queries, said a person familiar with the query who asked not to be identified discussing the matter due to its sensitivity. It’s not uncommon for the agency’s enforcement unit to send out letters across an industry as investigators seek to gauge whether a certain practice is widespread. Such broad inquiries may lead to investigations focused on the conduct of specific firms or people.

Fischer, the Moses Singer partner who previously worked as a senior SEC trial attorney, added that the queries will also likely lead to demand for more compliance specialists from investment firms.

As part of its request, in addition to asking firms to identify people responsible for overseeing a firm’s electronic communications policies, the SEC also sought details on reviews of policies and procedures, training programs, and related disciplinary action. The regulator also asked for documentation on how their organization is set up and details on some of their larger business units.

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

“This is a further demonstration of how the lines between banking and asset management continue to blur,” he said. “Banks and asset managers often operate in the same areas of business, so they often raise the same legal problems.”