NEW YORK, Sept 25 (Reuters) – The U.S. securities regulator has collected thousands of employee messages from a dozen major investment firms as it ramps up its investigation into Wall Street’s use of private messaging apps.
Earlier, the Securities and Exchange Commission (SEC) asked companies to review messages in its investigation into Wall Street’s use of WhatsApp, Signal and other unauthorized messaging apps to discuss work.
A two-year crackdown that initially targeted broker-dealers for potential violations of recordkeeping rules resulted in $2 billion in fines for regulators.
Although Reuters and other media outlets reported that the SEC’s investigation of “off-channel” communications had expanded to investment advisers, its move to review messages from thousands of employees was not previously reported. This represents an expansion of the investigation and raises the stakes for companies and executives involved in exposing their conduct to SEC scrutiny.
“It increases the risk,” said one source. “The more information you give to the SEC, the more you fuel the beast.”
The SEC has heard in recent months about news about personal devices or apps in the first half of 2021 discussing the business, the sources said, in the latest phase of the probe by more than a dozen investment advisers. It has targeted a selection of employees, in some cases up to a dozen people, including senior executives.
The companies include Carlyle Group ( CG.O ), Apollo Global Management ( APO.N ), KKR & Co ( KKR.N ), TPG ( TPG.O ), and Blackstone ( BX.N ). said a different person with direct knowledge of the matter, as well as some hedge funds, including Citadel.
Executives gave their personal phones and other devices to their bosses or lawyers to copy, and messages discussing business were turned over to the SEC, three people said.
This is in contrast to broker-dealer studies. In those cases, the SEC asked companies to review employee messages and tell the agency how many people were discussing work. SEC staff reviewed only a sample of the messages, according to three sources with knowledge of the previous investigations.
The sources spoke on condition of anonymity because SEC investigations are confidential.
At least 16 companies, including Carlyle, Apollo, KKR, TPG and Blackstone, have disclosed that the SEC is examining their communications. The companies did not provide additional details and did not comment for this story. A spokeswoman for Citadel declined to comment.
Government investigations are not evidence of wrongdoing and do not necessarily lead to charges.
An SEC spokesman declined to comment. Chairman Gary Gensler supported the communications probe, saying record-keeping rules are important in helping the SEC protect against wrongdoing.
“Now that they have that data — the SEC has the potential to find compliance failures somewhere unrelated to off-channel communications record-keeping issues,” said attorney Jacqueline Grodin of Colston & Storrs. A non-investigator.
Private fund fees and expenses, conflicts of interest and preferential treatment of investors are among the issues the SEC is paying more attention to, he noted.
‘Shooting Fish’
The problem of keeping tabs on employee communications has dogged Wall Street compliance departments for years. Because companies don’t monitor private messaging channels, using them to discuss business violates SEC-regulated employers’ requirements to record all business communications.
According to a 2021 settlement in which the bank agreed to pay the SEC $125 million, JPMorgan Chase ( JPM.N ) failed to provide documents related to an unrelated investigation dating back to at least 2018, when the SEC began to wade into Wall Street’s record-keeping problem. million to settle charges on registration defects.
The SEC has opened an investigation into the communications of other broker-dealers in 2021 after suspecting Wall Street was full of off-channel chatter about deals, trades and other business, two of the sources said. The misconduct proved so widespread that the agency was “shooting fish in a barrel,” one said.
The investigation is designed to be Gensler’s signature Wall Street enforcement effort, involving several big names including Wells Fargo ( WFC.N ), Bank of America ( BAC.N ), Goldman Sachs ( GS.N ) and Morgan Stanley.
It has generated millions in attorney fees, hiring dozens of lawyers to represent both companies and executives, according to multiple sources.
‘occupation’
The SEC began reaching out to investment advisers in October 2022, Reuters previously reported. As with broker-dealers, the SEC initially sought details about investment advisers’ registration policies. It then identified a group of executives and asked companies to search their devices and report what they found.
But the companies argued that their registration requirements are narrower than those of broker-dealers.
In a January letter led by the Managed Funds Association, the industry said the SEC’s request was “invasive” and raised privacy issues. Bloomberg previously reported the letter.
The SEC later demanded that the investment advisers hand over the messages, the sources said.
The agency ignores important differences in investment advisers’ registration requirements, said Jennifer Hahn, MFA’s executive vice president and chief counsel.
“Broadening the rules through unilateral enforcement actions circumvents due process and sets a dangerous precedent,” he said in a statement.
Reporting by Chris Prentice and Carolina Mandel. Editing by Michelle Price and Marguerita Choi
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