The Securities and Exchange Commission (SEC) has intensified efforts to regulate the use of unauthorized messaging apps, such as WhatsApp, by Wall Street firms for business purposes. Wall Street Journal reporter Menggi Sun reported the increase in scrutiny of off-channel communications.
The aim of the newly focused diligence is to ensure compliance with recordkeeping rules. This kind of watchfulness is rising in prominence because the use of off-channel apps can hinder the SEC’s ability to access necessary records for oversight. Since December 2021, the SEC has charged 60 firms and imposed over $1.7 billion in fines for failing to maintain and preserve electronic communication.
Off-Channel Apps: A Compliance Risk for Financial Firms
Financial professionals have incorporated off-channel apps like WhatsApp and iMessage into their business communications. While these apps offer convenience and encryption for private conversations, their use for official business communications poses challenges for regulatory oversight. The SEC’s enforcement actions highlight the need for firms to use authorized communication channels that comply with recordkeeping requirements.
How the SEC Determines Fines for Recordkeeping Violations
Sanjay Wadhwa, deputy director of the SEC’s enforcement division, outlined several factors that the SEC considers when assessing fines for recordkeeping violations:
- The firm’s size, to ensure penalties serve as an adequate deterrent
- The scope of the violations, such as the number of individuals using unauthorized messaging apps
- The firm’s compliance efforts to prevent off-channel communications, including the adoption of technological solutions
- The use of previous settlement orders as a guide for determining fines
The Importance of Self-Reporting
A crucial factor in reducing the size of possible fines for misuse of off-channel communications is a firm’s voluntary self-reporting of violations to the SEC. Wadhwa emphasized that self-disclosure can significantly lower recommended penalties. Even cooperation during the investigation can work to a firm’s benefit, in the absence of self-reporting.
The SEC’s Push for Stronger Compliance in the Digital Age
Gurbir Grewal, chief of the SEC’s enforcement division, stated that regulators aim to use higher fines as deterrents. He believes that stricter penalties imposed for violations tied to off-channel communications have positively influenced many firms’ behavior.
Grewal hopes for increased compliance and self-reporting, warning that future enforcement actions may involve even higher penalties if firms fail to address these issues.
Continue reading the The Wall Street Journal’s full article on SEC scrutiny of off-channel communications on Wall Street
