The Securities and Exchange Commission (SEC) recently charged a Silicon Valley Bank executive and his friend with insider trading. According to the SEC order, the former private equity banker worked for a Northern California-based bank in its group that assisted private equity firms in financing acquisitions of companies. On three occasions in 2015 and 2016, the bank executive tipped his friend using material, nonpublic information about upcoming acquisitions (two of which involved tender offers).
The former bank executive used the Whatsapp messaging platform and code words to provide tips to his friend. On July 28 and 29, 2016, the banker sent his friend text messages suggesting that the two communicate using WhatsApp because it was “encrypted.”
In a WhatsApp exchange on Friday, July 29, 2016, the banker gave his friend Sizmek’s ticker symbol using a code phrase and urged him to buy the stock soon, noting “announcement could come as early as 8/3,” referring to August 3, 2016, the date the PE Firm C-Sizmek tender offer would eventually be announced. Responding by WhatsApp, the friend agreed to share the profits of his planned Sizmek trades with the banker. The friend knew or had reason to know, that the information was nonpublic and that the banker gained the information through his position within the bank.
According to the orders, the banker bought stock in the target companies based on those tips and sold the stock after the acquisitions were announced, resulting in illegal gains of $51,700. The friend shared about $11,000 of these gains with the bank by giving him cash.
Federal prosecutors in San Francisco said last week that the former vice president banker will plead guilty to two counts of securities fraud in the insider trading case. His friend who traded has entered a deferred prosecution agreement.
Takeaway: manage all communications channels for compliance
Financial advisors are using mobile messaging to communicate with customers. There are regulations that financial firms and advisors must comply with to avoid penalties and non-compliance charges.
Financial firms must comply with record retention requirements to avoid penalties and reputational damage. Financial Industry Regulatory Authority (FINRA) clarified in Regulatory Notice 17-18 that financial firms must retain records of communications related to its business that are made through text messaging apps and chat services such as “WhatsApp.”
The notice states that “every firm that intends to communicate or permit its associated persons to communicate, with regard to its business through a text messaging app or chat service, must first ensure that it can retain records of those communications as required by SEA Rules 17a-3 and 17a-4 and FINRA Rule 4511. SEC and FINRA rules require that, for record retention purposes, the content of the communication determines what must be retained.”
The problem with using platforms like WhatsApp is that they present compliance risks to financial firms. They employ an encryption protocol to protect the messages from being intercepted. The same technology has prevented firms from capturing all work-related WhatsApp messages and calls of their employees.
This is an even greater challenge now. As firms have shifted to remote work and employees use various messaging applications, compliance concerns inevitably arise. So, while a prohibition policy may have worked before the pandemic — this is no longer a practical strategy for your business. Moreover, FINRA released COVID-19 guidance as they expect firms to maintain monitoring requirements of their employees while working from home. Clearly, the regulators are not relaxing the rules.
Smarsh prides itself on the breadth and depth of its supported content, including encrypted applications like WhatsApp. Organizations with compliance, open records and e-discovery requirements can leverage these popular IM tools and stay ahead of recordkeeping and oversight obligations.
Author: Marianna Shafir Esq. Regulatory Advisor at Smarsh
Marianna Shafir, Regulatory Advisor at Smarsh, is responsible for regulatory affairs worldwide. With her expertise in financial services industry, compliance and e-discovery, Marianna counsels Smarsh clients on meeting regulatory obligations, leveraging technology and guidance on best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco where she was an instrumental member on compliance teams.Marianna has also served as an adjunct professor at New York Career Institute where she taught Law Office Management and Real Estate Law. She earned her Juris Doctorate from Nova Southeastern University. She is a frequent speaker at industry conferences and a contributor to various online publications.
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