Wall Street is abuzz.
It is no secret that regulators hit big investment banks with $2 billion in fines for non-compliant use of messaging apps last year.
But expectations of a resolution were dashed as the investigations are now expanding. According to Bloomberg, the SEC is broadening the scope of its messaging compliance probe from big banks to the asset-management industry. Although hedge funds seem to be the focus of the new wave of audits, private equity, and brokerage firms are also facing the regulator’s scrutiny.
In a decisive move, the SEC has even asked several hedge funds to hand over employees’ personal mobile phones as part of a probe into the use of unofficial messaging platforms. The SEC is apparently after evidence of business dealings on unapproved channels.
And if this reminds you of something, that might be because last May, 100 investment bankers were reportedly livid over having to hand over their phones to regulators in a similar investigation.
Presumably, enough damning evidence was found last time – iMessage, WhatsApp, and other consumer messaging applications used for business communications with little to no recordkeeping systems in place.
It’s fair to assume this because, just four months later, the very same banks reached massive settlements with the SEC and CFTC.
And now, the asset-management industry is quickly emerging as the new front in the SEC’s investigation into whether financial professionals are using unofficial communications to cut deals, win clients, or make trades.
The SEC argues that business conducted outside of the view of a company’s compliance department can make it harder for the regulator to investigate potential wrongdoing later.
And, again, these are not just words – both the SEC and CFTC have shown that it is willing to go all the way and enforce these requirements.
But asset managers are not ones to take aggressive investigations lying down.
Their first line of defense is privacy.
On Tuesday, top industry trade groups sent SEC Chair Gary Gensler a letter, citing “serious privacy implications.” They claim that making copies of people’s phones poses risks of data breaches and exposing highly personal information, including health and financial information, or passwords.
But more substantively, the trade groups argue that the SEC is overreaching. The whole idea of demanding recordkeeping in messaging between advisors and clients is holding investment advisers to a standard that’s meant for brokerages and not money managers.
Now, it’s true that money managers may face less expansive SEC record-keeping rules than brokerages, with retention focused on documents related to investment advice.
And recently some commentators have come out against this entire probe, positioning it as unreasonable, or as just a way to extract sizable fines from rich entities.
But the SEC is not going to back down. And for good reason.
Let’s be clear. Hedge funds are in fact required to retain records of all communications related to their trading activities, including electronic communications. This is made abundantly clear in both SEC Rule 17a-4 (and related guidance), and CFTC Rule 1.31.
Indeed, it is essential for hedge fund managers and compliance officers to be aware of the major compliance risks associated with messaging app usage and take steps to ensure that all business conversations are recorded and archived, regardless of the channel.
It’s not helpful to turn a blind eye to reality: iMessage, WhatsApp, SMS, and other instant messaging platforms have become part of the mix used by hedge funds, especially when dealing with younger clients. Just like banning messengers didn’t help banks (unapproved usage continued), it won’t save hedge funds.
Instead, tech solutions must be found for maintaining a record of all business communications carried out over these channels, thus making them kosher.
Balancing client service, employee productivity, and the firm’s responsibility to protect itself is the right approach. We call it Responsible Business Communication. This approach encompasses much more than just regulatory compliance. It is wise for any firm to implement measures to maintain control of crucial business data and stay ahead of the curve.
In short, being proactive and future-proofing your business, is good advice for any hedge fund.
But if you need that extra push, consider this: the SEC is watching, now. And noncompliance can and likely will result in substantial fines and reputational damage.
LeapXpert has just the right solution, designed specifically for the asset management industry.
Talk to us today to learn more!
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