The Securities and Exchange Commission (SEC) is expanding the scope of its investigation into the use of unauthorized communications channels – turning its attention to hedge funds. This is the first sign that the focus is now shifting away from Wall Street giants and to the next tier, as predicted by SteelEye in November 2022.
In the most recent Wall Street WhatsApp development, the SEC has asked a number of hedge funds to hand over personal mobile devices belonging to certain employees. Another tier one firm has also confirmed that it has been pulled into the SEC’s investigation, although it is unclear if they have been asked to hand over personal mobile devices belonging to their employees.
The regulator has described this as the next step in its WhatsApp investigation, as it expands the scope of its messaging compliance probe.
The concern is that hedge fund employees have been using personal phones and unapproved channels such as WhatsApp to conduct business. The regulator worries that these channels are being used to conduct illicit conversations, to ultimately evade market oversight.
“Unfortunately, in the past, we’ve seen violations in the financial markets that were committed using unofficial communications channels, such as the foreign exchange scandal of 2013. Books-and-records obligations help the SEC conduct its important examinations and enforcement work. They build trust in our system,” said SEC Chair Gary Gensler in relation to one of the Wall Street fines.
In 2022, the SEC handed out a record number of fines to financial firms that totaled $6.4 billion, smashing the previous high set in 2021. A sizeable portion of those fines was tied to large tier-one banks, specifically related to their use of unmonitored messaging platforms like WhatsApp. However, in November 2022, SteelEye predicted that regulatory scrutiny would soon turn to the smaller firms, as we have now seen.
The announcement to hand over personal devices has drawn considerable ire and resistance from top industry trade groups, including the US Chamber of Commerce, American Investment Council, Investment Company Institute, and the Managed Funds Association.
The groups have collectively written to the SEC chair about what they believe are “serious privacy implications.” While these committees are positioning the entire probe as unreasonable and excessive, the SEC has made it clear that they will not let up in their investigation and that they are within their rights to demand these additional measures, including the handing over of phones.
In response to a tightening regulatory clasp, several firms have announced changes to mitigate the future risk of unmonitored communications. For example, one firm has announced that it will be issuing self-imposed fines of up to $1m for employees that violate the company’s policies regarding the use of unmonitored channels. However, this approach has been questioned by many industry practitioners who believe it is a reactive and short-term solution to a much bigger problem that needs to be addressed with a technology-led approach.
Managing eComms is a systemic challenge across the industry and in 2022, only 4% of smaller financial firms viewed increasing the coverage of different communications channels as a compliance priority, and only 15% of firms overall were monitoring WhatsApp. These figures were revealed in SteelEye’s 2022 Compliance Health Check Report.
If the initial crackdown that took place in 2022 was not enough for firms to reconsider their stance on monitoring eComms, the increased scope of the SEC’s probe will likely get the message across.
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