Gensler Reminds Hedge Funds He's Still Sheriff of Wall Street

Gary Gensler is much more curious about what private equity and hedge fund chiefs are texting to each other and their clients than he was about bankers. The chair of the Securities and Exchanges Commission has asked staffers to pore over thousands of messages collected from investment firms as part of its probe into industry use of WhatsApp and other non-official messaging channels, according to Reuters.

Big investment banks have already been collectively hit with about $2.5 billion in fines for poor record-keeping over employees’ use of texts to discuss business. But banks were allowed to mark their own homework, and the SEC reviewed only a sample of messages to keep them honest.

Gensler has taken a more invasive approach to private equity and hedge funds, reportedly including Apollo Global Management Inc., Carlyle Group Inc., Citadel and KKR & Co., even though money managers in general face less onerous record-keeping requirements than banks.

The SEC’s snooping doesn’t mean it suspects wrongdoing among these big fund managers or that it will find any. But its investigations could still prove very useful to help it better understand the industry’s actions and incentives.

The context is Gensler’s ongoing fight with private funds over disclosure, fees and conflicts of interest. The regulator adopted new rules in late August designed to improve transparency in the multi-trillion-dollar alternative investment industry. Lobbyists won major concessions, getting the agency to dilute or abandon some of the industry’s most hated aspects of the original proposals. Yet, trade groups including the American Investment Council and Managed Funds Association this month launched a suit against the SEC to get regulations overturned.

Among other things, the rules ban fund managers from offering different, sweetheart terms to some investors that others don’t get, such as alternate fee structures or redemption rights. The industry has been battling the changes all the way, often using the traditional argument that the extra reporting and compliance expenses will hurt returns, or that their sophisticated clients don’t need the SEC’s protections.