Why is the SEC Giving Fines for WhatsApp Use

The SEC (U.S. Securities and Exchange Commission) requires companies to comply with various regulations related to communication monitoring, archiving, and surveillance.

Regarding WhatsApp, the SEC has not issued specific regulations on monitoring and archiving WhatsApp messages. However, companies in regulated industries such as finance, healthcare, and legal may be required to monitor and archive WhatsApp communications if they contain information that is subject to regulatory oversight.

SEC Requires Controls, Archiving and Visibility

In general, the SEC requires companies to establish and maintain systems and controls to monitor, archive, and surveil electronic communications, including emails, instant messages, and other forms of digital communication. These requirements are outlined in various regulations such as the Securities Exchange Act of 1934, FINRA (Financial Industry Regulatory Authority) Rule 3110, and SEC Rule 17a-4.

Companies subject to SEC regulations must also implement policies and procedures for the retention, retrieval, and review of electronic communications, and they must ensure that their monitoring and archiving systems are capable of capturing and storing all relevant communications.

Additionally, companies must notify their employees that their communications may be monitored and archived and obtain their consent where required by law. Companies must also periodically review and test their communication monitoring and archiving systems to ensure that they are functioning effectively and in compliance with applicable regulations.

Suspect Investor/Company Communication

In recent years, the Securities and Exchange Commission (SEC) has been increasingly concerned about the use of WhatsApp for communication between companies and investors. The SEC has taken action to enforce regulations and impose fines on companies that have violated these rules.

The SEC’s concern about WhatsApp stems from the fact that it is a popular messaging app that can be used to share information about securities trading. In some cases, this information may be considered material, and sharing it without proper disclosure could be considered insider trading. The SEC has the authority to regulate such activity under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Steep Fines for WhatsApp Use

In recent years, the SEC has fined several companies for violating these rules. For example, in September 2020, the SEC fined Goldman Sachs $2.9 billion for its role in the 1MDB scandal. As part of this settlement, Goldman Sachs admitted to violating the Foreign Corrupt Practices Act by using WhatsApp to communicate about sensitive information related to the deal.

In another case, in July 2019, the SEC fined Kik Interactive $5 million for conducting an unregistered initial coin offering (ICO). The SEC found that Kik had used WhatsApp to communicate with investors about the ICO without proper disclosure. As part of the settlement, Kik was required to register the offering and pay a fine.

The SEC has also taken action against individuals who have violated these rules. For example, in October 2020, the SEC charged a former IT employee of Equifax with insider trading for using WhatsApp to share non-public information about a data breach with friends and family before the breach was publicly announced.

The Legal Basis

The legal basis for the SEC’s authority to regulate communication on WhatsApp comes from the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require companies to provide full and fair disclosure of all material information related to securities trading. Failure to comply with these regulations can result in fines, penalties, and legal action.

The SEC has made it clear that communication on messaging apps like WhatsApp is subject to these regulations. In a statement issued in November 2019, the SEC warned that “companies and individuals should be mindful that they remain obligated to comply with the securities laws even when using new technologies.”

Justified Concerns and Compliance Requirements

The SEC’s concern about WhatsApp is rooted in its potential use for insider trading and other violations of securities regulations. The SEC has the authority to regulate communication on this app and has imposed fines and other penalties on companies and individuals that have violated these rules. Companies and individuals must be mindful of these regulations and ensure that they comply with them when using new technologies for communication about securities trading.