Firms nailed with $555m in fines for using messaging apps
- October 1, 2023: Vol. 10, Number 9

Firms nailed with $555m in fines for using messaging apps


Almost a dozen financial firms have agreed to pay about $555 million in total to the SEC and the Commodity Futures Trading Commission, admitting that their employees used banned messaging applications that broke record-keeping rules. As part of the settlements, the firms also agreed to retain independent compliance consultants to review their policies and procedures related to the retention of electronic communications on personal devices as well as their respective frameworks for addressing their employees’ breaches of these policies. The firms admitted that their employees had frequently used such “off-channel” communications for business activities since at least 2019, the “substantial majority” of which were not maintained or preserved as required by federal securities laws. (Wall Street Journal)



SEC chairman Gary Gensler warned in a new interview that artificial intelligence will eventually lead to financial crises. “This technology will be the center of future crises, future financial crises,” Gensler told The New York Times. “It has to do with this powerful set of economics around scale and networks.” Gensler predicted the future business systems in the United States will be reliant on two or three foundational models, which he says would make a financial crash more likely due to “herding,” which means all companies will rely on the same information. The SEC proposed a new rule earlier this year that would require investment advisers to rid conflicts of interest in their technologies. Gensler said in a press release at the time that AI could place brokers’ or investment advisers’ interests above the investors’ interests, which is what the proposed rule would aim to curtail. “Investment advisers under the law have a fiduciary duty, a duty of care, and a duty of loyalty to their clients,” Gensler said. “And whether you’re using an algorithm, you have that same duty of care.” Financial industry critics are questioning whether the agency’s plan expands Regulation Best Interest and signals more compliance headaches under the SEC marketing rule. (The Hill)



The SEC enforcement division has issued formal requests, including subpoenas, to a number of investment firms over their sustainable investment advertising practices. This escalation shows the SEC’s heightened scrutiny on environmental, social and governance funds. A significant point of concern for the SEC includes mainstream investment funds transitioning into ESG-focused entities. Additionally, there’s interest in funds marketed both in the United States and Europe that may possess similar investment strategies, assets or management teams, yet provide varying levels of disclosure depending on the region. (InvestmentNews)



Advisers worried about the implementation of the SEC marketing rule may find this is just a warm-up compared to what they could be experiencing over the next two years. What’s coming next is the finalization of a number of major SEC rules that affect advisers, including regulations regarding outsourcing; custody; cybersecurity; the use of environmental, social, and corporate governance in portfolios; and mutual fund liquidity, among many others. Beginning early next year, it is likely the SEC will approve many final rules that will become effective from January through early fall, many of which are hundreds of pages long. Firms will face added costs and a huge amount of compliance work. (InvestmentNews)



The SEC voted 3-2 to finalize a controversial rule that will require increased disclosure from private fund advisers and prohibit certain fee arrangements. Specifically, the rule will require private fund advisers to supply investors with quarterly statements, including information on fees, expenses and performance; obtain an annual audit for each fund it manages; and acquire a fairness opinion in connection with an adviser-led secondary transaction. It will also bar advisers from various activities and practices “that are contrary to the public interest and the protection of investors,” unless they disclose certain information or, in some cases, receive consent from investors. The rule prohibits certain types of preferential treatment without disclosing such treatment to current and prospective investors as well. Rep. Patrick McHenry (R-NC), chairman of the House Financial Services Committee, said, “I urge the SEC to rescind this ill-advised rule, which is a thinly veiled attempt to dictate private fund management.” However, the SEC did not proceed with proposals that would have expanded funds’ legal liability and outright banned arrangements that allow some investors special terms. (Pensions & Investments)

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