Behind the SEC’s WhatsApp Crackdown

If you’re sliding into DMs, don’t do it on WhatsApp.

Conversations with clients over non-monitored platforms, like messaging apps or personal emails, have become public enemy No. 1 for the Securities and Exchange Commission. The agency has already dished out more than $3 billion in fines regarding off-channel communications, with another 11 firms from Invesco to Stifel getting dinged this week. More than two dozen advisors agreed to sanctions last month: Ameriprise, Edward Jones, LPL, and RayJay paid $50 million each. 

It’s a considerable crackdown that’s now coming under fire from members of the agency itself. Commissioner Hester Peirce told lawmakers the initiative has turned into a “cash cow” for the SEC. “The typical case has not been based on fraud,” she said during a House Financial Services hearing Tuesday.

Channel Surfing

While it seems simple to stay off unapproved apps, the issue is actually a little more nuanced. According to lawmakers at the hearing, much of the off-channel comms occurred during the onset of the pandemic, when advisors were working from home and had little choice but to reach out to clients on personal phones. (We would all like to forget pandemic-era Wi-Fi issues.)

“COVID changed the world and the way we do things,” Peirce said. “That’s why we should have taken a regulatory approach first.”

Hold The Phone. On the other hand, the agency is just doing its job. When all is said and done, the actions may deter bad apples from providing misleading information to investors. “We’ve seen far too many examples of stock brokers and advisors attempting to defraud investors by misrepresenting what they’re selling them,” said Bill Singer, a securities lawyer with over four decades in the industry, adding that “surreptitious” conversations, more likely than not, occur on private lines.

The agency has also appeared to be indiscriminate in its actions, targeting both large financial institutions and smaller independent shops:

• Citigroup, Goldman Sachs, Bank of America and 13 other firms were collectively fined more than $1 billion in 2022 for using WhatsApp and personal emails.
• New York-based Senvest Management became the first RIA fined for off-channel comms in April of this year.

Message In a Bottle. The agency will also need to be careful that enforcement actions aren’t punishing new forms of communication or making it harder for advisors to reach out to clients. Millennials and Gen Xers, for example, are much more comfortable than previous generations with online communication.

The SEC also has to make sure it’s spending its precious time and resources on the most important challenges facing the industry. “You have to wonder if the just-published settlements are more calculated as a diversion rather than an example,” Singer said. “Did they truly merit being placed on the SEC’s front burner?”