> We have talked before about the SEC’s probe into how the employees of big banks discussed their work in text messages and chat apps like WhatsApp on their personal cell phones. The SEC has collected big fines from the biggest banks because, it has said, these chats violated the SEC’s recordkeeping requirements. When the SEC fined 15 banks and brokers for this stuff in September, SEC Chair Gary Gensler said:
> > Since the 1930s, such recordkeeping has been vital to preserve market integrity. As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.
> From the perspective of the banks, I have argued, this is a novel expansion of the SEC’s authority. When the SEC created its rules on recordkeeping, it required banks to retain copies of their “inter-office memoranda,” but it was 1948 and those memoranda were produced with carbon paper; they were formal business records memorializing serious policies. In the 2020s, WhatsApp chats are, in large part, substitutes not for formal memoranda but for talking to someone in person. When I was a banker, I have written, “There were some mornings when I sent more than 100 inter-office memoranda, though like 20 of them would be ‘lol’ or ‘fml.’” In 1948, the SEC would not have dreamed of demanding a searchable archive of all of the informal chats held at a brokerage: That was not technologically feasible, and also did not seem to be the point of its rules. In 2022, it was feasible, and the SEC did demand it, and when the brokers were missing some chats they paid a billion dollars in fines.
> From the perspective of the SEC, as a fine-maximizing business, this series of investigations is so attractive:
> - Every bank has some bankers who did WhatsApp chats, so you can fine all of them, and they all have a lot of money and depend on the SEC’s goodwill, so they’ll pay.
> - You don’t have to prove bad intent, or harm: Simply finding some WhatsApp chats about deals, or clients, or market conditions, or anything, is enough to extract a big fine. If the SEC had gotten the personal messages of a bunch of bankers and found them doing a bunch of crimes, it surely would have extracted more fines from them, but as far as I can tell it never found anything like that. The bankers had normal businesslike chats about client meetings or markets or whatever, but the fact that they were on WhatsApp was enough to incur a billion dollars of liability.
> - Banks will learn their lesson from these enforcement actions, and the lesson is “keep all communications on official channels and preserve all of them,” which will make it easier for the SEC to catch future misbehavior and fine it comprehensively.
> If I worked at a bank I’d be very annoyed by the WhatsApp stuff, but as it is I sort of admire it: It is, for the SEC, a clever bit of business, a bold expansion into a lucrative and growing market, and an investment in making its future business easier.
> The SEC clearly agrees, because its WhatsApp Fines Division keeps moving into new markets:
> > Major hedge funds have been asked by US regulators to review certain employees’ personal mobile phones as part of a mushrooming probe into Wall Street’s use of unofficial messaging platforms like WhatsApp to conduct business.
> > The Securities and Exchange Commission recently asked Steve Cohen’s Point72 Asset Management, Ken Griffin’s Citadel and several other firms to search through the devices for evidence of business dealings on unapproved channels, according to people familiar with the matter who asked not to be identified discussing the private requests. The SEC is also probing the practices of brokerages, money managers and private equity firms.
> > Representatives for Point72 and Citadel declined to comment. Neither firm has been accused of wrongdoing. The inquiries are part of a broader request that also went to other hedge funds, the people said. The SEC declined to comment.
> > The asset-management industry is quickly emerging as the new front in the SEC’s sweeping look into whether financial professionals are using unofficial communications to do things like cut deals, win clients or make trades. …
> The appeal of this investigation is that at every big company there will be people who have texted about business on their personal cell phones, and the right model is to go down the list and hit all the biggest financial businesses up for fines.
> It really is wild that the SEC’s official position is now that it is illegal to “use unofficial communications to do things like cut deals, win clients or make trades.” “Conduct their communications about business matters within only official channels”! Imagine if that was really the rule! You can’t have lunch with a client and talk about business, or have beers with your colleagues and gripe about work, because that does not create a searchable archive for the SEC to review.
> Of course the SEC does not entirely mean this. Yet. But in like five years, technology — and the SEC’s interpretation of the rules — will have advanced to the point that banks will get fined if their bankers talk about business with clients on the golf course. “You should have been wearing your bank-issued virtual reality headset and recorded the conversation,” the SEC will say, or I guess “you should have played golf in your bank’s official metaverse, which records all golf conversations for compliance review, rather than on a physical golf course.” The golf course is an unofficial channel! No business allowed!
When litigation holds were invented, they covered a certain form of formal communication—stuff that was written down, and official, and represented the considered positions of the company; not the emotional and not-yet-sanded down resentment of the rank-and-file. But now so much more casual conversation takes place in a written format then at any other point in time. It is not surprising to me that, if you pored over the thousands and thousands of chat messages from Google employees in areas around pricing, or supplier relations, you'll find some resentment and chafing at the restrictions imposed by Google's compliance lawyers.