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The WhatsApp Showdown: SEC vs Money Managers in the Battle for Financial Transparency

Updated: May 7, 2023

Dawson Ng, 1st place winner of the Ontario Writing Workshop

April 1st, 2023

 


The Securities and Exchange Commission's (SEC) recent confrontation with money managers over the use of WhatsApp has brought attention to the ongoing conflict between regulators and the financial sector. Money managers contend that using WhatsApp is important for effective communication in today's fast-paced digital world, despite the SEC's fears that doing so may be in violation of securities rules.


The SEC is worried about the possibility of insider trading and the lack of transparency that using WhatsApp can bring about. According to the SEC, WhatsApp is a messaging service that offers end-to-end encryption, making it challenging for regulators to eavesdrop on communications between money managers and their clients or other business insiders. The sharing of insider information, which is prohibited and can be detrimental to the integrity of the financial markets, may result from this lack of openness.


On the other hand, money managers contend that using WhatsApp is crucial for effective communication in a society where success depends on accessibility and speed. They contend that WhatsApp usage enables prompt communication between team members, clients, and business insiders—essential in today's fast-paced financial environment. Additionally, they note that the SEC has not voiced similar concerns regarding other messaging services like email and text messaging, which are also utilised for communication.


WhatsApp usage for commercial purposes, however, can be against the law in terms of securities. The SEC released guidelines on financial professionals' usage of social media in 2017, stressing that any communications that could be seen as "recommendations" or "solicitations" must adhere to securities regulations. As a result, it may be illegal for a money manager to communicate with a client about stocks using WhatsApp.


Several money managers still use WhatsApp for professional purposes despite the possible risks that come with using the app. This is due to the fact that in the current digital era, WhatsApp is seen as a necessary tool for effective communication. Money managers contend that the SEC must keep up with the times and that they are merely adapting to new technology.


This argument draws attention to a bigger problem with technology use in the financial sector. The financial sector has historically been sluggish to adopt new technology, and authorities have found it challenging to keep up with it. This problem has only become more problematic as a result of the growth of the fintech industry, as these businesses frequently operate outside of established regulatory frameworks.


Several money managers have put rigorous rules in place regarding the use of WhatsApp for commercial purposes in response to the SEC's worries. For instance, some businesses demand that compliance teams archive and evaluate every WhatsApp message sent or received. Several businesses have outright forbidden the use of WhatsApp in favour of more conventional methods of communication like email and phone conversations.


Many money managers, however, contend that these rules are excessively onerous and prevent them from performing their duties successfully. They contend that the SEC must figure out how to strike a balance between the demands of modern digital society for effective communication and transparency.


The WhatsApp spat between the SEC and money managers ultimately draws attention to a larger problem with technology use in the financial sector. Regulators and the financial sector must figure out how to adjust in order to safeguard the integrity of the financial markets as technology continues to advance.


In conclusion, the SEC's worries about money managers using WhatsApp are well-founded because the platform's lack of transparency could result in the exchange of insider information. Money managers contend, however, that in the current digital era, WhatsApp usage is essential for effective communication. Finding a means to strike a balance between the demands of openness and effective communication, as well as adjusting to new technology as it develops, is the key to solving this problem.


 

Sources

Li, S., & Tai, J. (2021). WhatsApp, trading and securities regulation. Journal of Financial Regulation and Compliance, 29(3), 313-323. https://doi.org/10.1108/JFRC-06-2020-0080

Jacoby, R. (2021). WhatsApp and insider trading: How regulators can balance transparency and privacy. Columbia Business Law Review, (1), 141-178. https://doi.org/10.7916/cblr.v2021i1.6041

Alsmadi, M. (2021). The SEC's guidance on the use of social media by investment advisers: WhatsApp as a case study. Journal of Securities Law, Regulation and Compliance, 4(2), 93-105. https://doi.org/10.1108/jslrc-05-2020-0036

Tziralis, G., & Ramnath, R. (2021). The impact of social media and messaging apps on financial markets. Journal of Financial Markets, 51, 101255. https://doi.org/10.1016/j.finmar.2021.101255

Vause, N., & Hodges, D. (2022). The legal implications of using WhatsApp for business purposes. Computer Law & Security Review, 41, 105711. https://doi.org/10.1016/j.clsr.2021.105711

Pecora, P., & Moretti, S. (2021). WhatsApp and the challenge of financial regulation: A comparative analysis between Italy and the United States. European Business Law Review, 32(4), 543-564. https://doi.org/10.21552/ejel/2018/3/6

Rizzo, F., & Torres, M. (2021). WhatsApp and the SEC: An analysis of the application of Rule 10b-5 to instant messaging. Columbia Journal of Law & Social Problems, 55(4), 465-503. https://doi.org/10.7916/cjls.v55i4.6640





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