The SEC Risks Being Ensnared in Its WhatsApp Trap

“Very strict enforcement” is a euphemism used by the American Automobile Association to warn motorists of places where even minor traffic violations will likely be caught and punished with heavy fines. The designation “speed trap” is reserved for very strict enforcement places that appear to be using fines to fund local budgets rather than to improve traffic safety.

The Securities and Exchange Commission has always been known for very strict enforcement, as is appropriate given the vast amount of money that flows through US securities markets, their importance both to the financial well-being of individual investors and the economy, and the gigantic rewards that can be harvested via dishonesty that might seem trivial in other contexts. However, the SEC may be crossing the line from very strict enforcement to speed trap with its fines for the use of WhatsApp and other messaging services by financial industry professionals.

In 1948, in Rule 17a-4(b), the SEC decided firms were required to keep “originals of all communications received and copies of all communications sent…relating to his business as such.” At the time this meant letters, written notices, contracts, statements, presentations and other formal documents. No one took it literally as meaning spoken communication (in-person or by telephone), informal notes, employee party announcements and the like.

Over the years, primarily due to technological improvements, the rule was expanded to cover many recorded telephone conversations, emails and texts. But everyone — and not just in finance — understood the difference between formal written communication and use of official firm-monitored systems; and unmonitored communication. The latter was used for things you didn’t want your boss, or human resources, or compliance, or co-workers, or regulators to see. It included discussions of job opportunities outside the firm, gripes about your manager, not-safe-for-work jokes and gossip about co-workers.

The line between “relating to business” and personal is blurred, and most actual communication between two humans contains both. You might call up a customer to quote a price, but also ask about her social life or tell her a funny story about a mutual friend. You might respond to a business text from a co-worker and include a complaint about the latest HR training. Employees naturally use monitored, official firm systems for formal business communications and safe-for-work personal stuff, and some alternative channel for everything else.

The SEC decided a few years ago that messaging from employees’ personal devices relating to business fell under “communications” as understood by the 1948 rule, rather than the informal conversations the employees had intended them to be. Instead of telling firms to either start collecting these messages or forbid employees from any business-related communication on them, it began an investigation that has resulted in about $2.7 billion of fines (including parallel fines from the Commodity Futures Trading Commission) and is expanding beyond the brokers covered by the 1948 rule.