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SEC WhatsApp probe digs deeper into asset management staff

The wide-ranging US survey of the use of third-party messaging services such as WhatsApp at major banks is now attracting record holders from major investment firms.

The wide-ranging US survey of the use of third-party messaging services such as WhatsApp at major banks is now attracting record holders from major investment firms.

The Securities and Exchange Commission has asked money managers for details about who oversees the retention of electronic communications at their companies, according to the request reviewed by Bloomberg News. The question is part of a letter the regulator recently sent to some of the industry’s biggest players seeking information on policies and key personnel whose texts and emails should be archived.

The new focus on investment firms indicates more sanctions are likely to follow after the SEC and Commodity Futures Trading Commission shut down banking giants, including JPMorgan Chase & Co. company.

“It shows that the SEC’s investigation goes beyond the largest broker-dealers and is likely to extend to all corners of the financial services industry,” said Howard Fischer, partner at law firm Moses Singer. “With more and more employees in the financial sector still not in the office five days a week, and with the increased use of unofficial means of communication, the potential liability can be enormous.”

The SEC declined to comment.

Under SEC rules, money managers face less comprehensive record-keeping rules than brokers, with custody focused on documents related to investment advice. However, like banks, investment firms are required to monitor communications about their business to prevent inappropriate behavior.

The proliferation of mobile messaging apps has made that more challenging. Compliance systems came under further strain as employees worked from home during the pandemic.

By imposing record fines on brokers over the past year, the SEC viewed bankers’ use of WhatsApp to make deals and arrange transactions as much more than a simple violation of the administration. Using unapproved devices, the regulator said, means investigators cannot access documents they need to carry out surveillance and eradicate misconduct.

The agency’s growing interest in investment firms also poses risks for executives at those firms. As the SEC ramped up its investigation into Wall Street’s banks, the regulator forced lenders to systematically search more than 100 personal cell phones owned by top traders and dealmakers.

Dozens of investment firms have received the questions, said one person familiar with the question, asking not to be identified as he discussed the matter due to its sensitivity. It’s not uncommon for the agency’s enforcement unit to send letters in an industry while investigators try to gauge whether a particular practice is widespread. Such broad investigations can lead to investigations that focus on the behavior of specific companies or individuals.

Fischer, the Moses Singer partner who previously served as a senior SEC litigation attorney, added that the questions are also likely to lead to demand for more investment firm compliance specialists.

As part of its request, the SEC not only asked companies to identify people responsible for overseeing a company’s electronic communications policies, but also details about policies and procedures reviews, training programs, and related disciplinary action. The regulator also asked for documentation on how their organization is set up and for 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 the administration of investment firms is a logical continuation of its brokerage research.

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

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