SEC, CFTC hit delete on firms’ WhatsApp, texting

Regulators of U.S. securities and derivatives struck another blow against Wall Street’s use of WhatsApp and other “off channel” communications with a series of enforcement actions against industry firms.

The U.S. Securities and Exchange Commission (SEC) filed charges against 10 firms — including five broker-dealers, two investment advisers, and three dual firms — for extensive violations of record-keeping requirements.

The firms agreed to pay a combined US$79 million to settle the charges, and to undertake improvements to their compliance policies and procedures to fix the violations.

The SEC said its investigations “uncovered pervasive and longstanding off-channel communications at all 10 firms.”

In particular, it found that employees used personal text messages and apps such as WhatsApp to conduct business, make recommendations and transmit advice.

“The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws,” it said, adding that this likely also prevented the SEC from examining these sorts of communications as part of its enforcement investigations.

Interactive Brokers Corp. and its affiliate, Interactive Brokers LLC, were hardest hit by regulators.

The SEC imposed a US$35 million penalty on the firms, and they were also sanctioned by the U.S. Commodity Futures Trading Commission (CFTC) for the same issues. The settlement with the CFTC included a US$20 million penalty.

Perella Weinberg Partners LP got off easiest, with just a US$2.5 million penalty.

The SEC noted that Perella Weinberg Partners self-reported the violations, whereas the misconduct at the other firms was uncovered as part of a compliance sweep.

“One of the orders included in today’s announced actions is not like the others,” said Gurbir Grewal, director of the SEC’s enforcement division, in a release.

“There are real benefits to self-reporting, remediating and cooperating,” he added.

This isn’t the first time U.S. regulators have taken action against industry firms for their use of apps that aren’t captured by their compliance units. The SEC has previously charged 30 other firms for similar misconduct, and the CFTC has now imposed over US$1 billion in penalties on 20 financial institutions for unapproved communications.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.