Asset managers and rating agencies are bracing for the SEC’s next round of text message fines

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Asset managers and rating agencies are bracing for possible fines and penalties as the Securities and Exchange Commission expands its investigation into employees who text about company business on personal devices and other unofficial channels.

Since 2021, the US financial regulator has collected about $2 billion in civil penalties from dozens of Wall Street firms to settle allegations that employees used their own cellphones and apps like WhatsApp to discuss issues of work, without keeping records of those conversations.

The SEC on Wednesday levied nearly $400 million in fines in the latest batch of settlements with 26 Wall Street firms.

The years-long probe, which began with investment bankers, isn’t over yet: BlackRock, Blackstone, Invesco and Moody’s all revealed they were contacted about the SEC’s texting probe.

Some have already set aside tens of millions of dollars to cover expected penalties, according to a review of recent regulatory filings.

As regulatory staff pressed ahead with the enforcement effort — fueled by concerns that poor record-keeping could jeopardize other investigations — investment industry advocates grew increasingly concerned about paying large fines to an authority of regulation that they believe exceeds their limits.

“Our concern with expanding the scope of this investigation and these examinations to cover asset managers is that the SEC may go beyond what is actually necessary,” said Ken Fang, associate general counsel at the Investment Company Institute.

Under Chairman Gary Gensler, the SEC has pushed to pursue misconduct, with “a clear focus on pursuing creative theories of enforcement,” said David Oliwenstein, a former SEC attorney and partner at the law firm Pillsbury Winthrop Shaw Pittman.

“Obviously there’s a legal catch to it, but it’s not an area that has historically been pursued,” Oliwenstein said. “I think the SEC staff thinks they have a lot of influence here.”

Invesco has set aside $50 million in connection with the SEC investigation plus “a separate regulatory matter,” according to a recent filing.

Charles Schwab said in a filing that it incurred a $43 million charge related to both the texting probe and an unrelated matter, and BlackRock also disclosed that is cooperating with the SEC in connection with the texting investigation.

Moody’s said in a filing that it has reached a settlement in principle with the SEC’s enforcement division, noting that the settlement will likely include a $20 million civil penalty, and S&P Global Ratings disclosed that it is in “advanced discussions” with SEC staff regarding the electronic system. messenger probe.

The SEC previously settled with DBRS and Kroll Bond Ratings Agency, which agreed to pay lower fines.

Private equity firms including Blackstone and Apollo Global have previously disclosed that they have set aside funds for their “estimated debt” in recent regulatory disclosures, although they have not specified the exact amounts they expect to be fined as the SEC investigation expand.

ICI’s Fang said asset managers are “generally risk averse” and prefer to avoid litigation when possible.

“It’s easier for those firms to settle, take the hit of the penalty as a cost of doing business and then move on,” Fang said.

The SEC declined to comment. In a statement accompanying earlier settlements this week, he reiterated his concern that when companies fail to keep relevant records, further investigations can be hindered to the detriment of investors.