By:  Hadassa Kalatizadeh

Thousands of private WhatsApp messages from staff at more than a dozen major investment banking firms have been collected by US securities regulator in an ongoing probe.

As reported by the NY Post, the Securities and Exchange Commission has escalated its probe into Wall Street’s use of private messaging apps, which are not approved for discussing work – including WhatsApp and Signal. Four sources for the Post with direct knowledge of the matter, say that the two-year crackdown has reached new heights, with the SEC collecting thousands of staff messages, having previously asked the firms to internally review the messages.  The probe, which has netted US Securities regulators some $2 billion in fines, was initially targeting brokers for potential breaches in record-keeping regulations when it was initiated in 2021.  Because companies do not surveil personal messaging channels, the SEC says that employees should not be using them to discuss business, as doing so puts them in breach of requirements to record all business communications.

Reuters and other media had previously reported that the SEC’s communication probe was expanded to include investment advisers, not just brokers.  Now, the new progression into reviewing thousands of private staff messages is further raising alarm at the large investment banks, marking an escalation of the investigation.  “It increases risk,” one source told the Post. “The more information you give the SEC, the more you fuel the beast.”

“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.

Executives at the firms had been asked to search the devices and report back on what they found.  The companies, however, resisted, arguing their record-keeping requirements are narrower than broker-dealers’ and that the request was “invasive” and raised privacy issues.  Now, the SEC stepped in to search on their own.  In the last few months, over a dozen investment advisers had the SEC probe messages for business discussions from the first half of 2021 on personal devices or applications, the sources said.

Dozens of employees were targeted, including senior executives.  Per the Post, companies included in the probe include:  Apollo Global Management, Blackstone, Carlyle Group, KKR, TPG, and  possibly also some hedge funds, including Citadel, per sources who spoke on the condition of anonymity because SEC investigations are confidential.  Some 16 companies confirmed that the SEC is probing their communications.  Previously in the broker-dealer probes, the SEC asked companies to review staff messages and report to the agency how many messages discussed work.

The SEC is ignoring important differences in investment advisers’ recordkeeping requirements, said Jennifer Han, the Managed Funds Association’s executive vice president and chief counsel, defending industry members.  “Unilaterally expanding the rules by enforcement actions sidesteps due process and creates a dangerous precedent,” Han said in a statement.