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Asset managers and rating agencies are preparing for possible fines and sanctions as the Securities and Exchange Commission expands its probe into employees texting about company business on personal devices and other unofficial channels.
Since 2021, the US financial regulator has amassed about $2bn in civil penalties from dozens of Wall Street companies to settle charges that employees have used their own cell phones and apps like WhatsApp to discuss work matters, while failing to preserve records of those conversations.
The SEC on Wednesday levied nearly $400mn in fines in the latest batch of settlements with 26 Wall Street firms.
The years-long probe, which started with investment bankers, is not finished yet: BlackRock, Blackstone, Invesco and Moody’s all have disclosed that they were contacted in relation to the SEC’s texting investigation.
Some already have set aside tens of millions of dollars to cover expected penalties, according to a review of recent regulatory filings.
While regulatory staff have pushed on with their enforcement effort — fuelled by concerns that poor record-keeping could imperil other investigations — investment industry advocates have grown increasingly worried about paying high fines to a regulator they feel is overstepping its bounds.
“Our concern with expanding the scope of this investigation and these examinations to cover asset managers is that the SEC may be broadly going over what is actually required,” said Ken Fang, associate general counsel at the Investment Company Institute.
Under chair Gary Gensler the SEC has pushed to pursue misconduct with “a clear emphasis on pursuing creative theories of enforcement,” said David Oliwenstein, a former SEC enforcement attorney and partner with the Pillsbury Winthrop Shaw Pittman law firm.
“There’s obviously a statutory hook for it, but it’s not an area that’s been pursued historically,” Oliwenstein said. “I think the SEC staff believe they have a lot of leverage here.”
Invesco has set aside $50mn in connection with the SEC’s investigation plus “a separate regulatory matter,” according to a recent filing.
Charles Schwab in a filing said it incurred a $43mn charge related to both the texting probe and an unrelated matter, and BlackRock also has disclosed that it is co-operating with the SEC in connection with the texting investigation.
Moody’s said in a filing it had reached a settlement agreement in principle with the SEC’s enforcement division, noting that this deal would likely include a $20mn civil penalty, and S&P Global Ratings disclosed it was in “advanced discussions” with SEC staff over the electronic messaging probe.
The SEC previously settled with DBRS and Kroll Bond Ratings Agency, which agreed to pay smaller fines.
Private equity firms including Blackstone and Apollo Global also have previously disclosed that they have set aside funds for their “estimated liability” in recent regulatory disclosures, although they did not specify the precise amounts they expect to be fined as the SEC’s investigation expands.
The ICI’s Fang said that asset managers are “generally risk-averse” and prefer avoiding litigation when possible.
“It’s easier for those firms to settle, to take the hit of the penalty as a cost of doing business, and then just move forward,” Fang said.
The SEC declined to comment. In a statement accompanying the earlier settlements this week it reiterated its concern that when companies fail to preserve relevant records, subsequent investigations can be hampered to the detriment of investors.
