Ephemeral Sweeps: President-Elect Trump’s SEC Expected to Abandon Probes into Use of WhatsApp and “Off-Channel” Messaging Platforms

Conducting business in the modern age involves an enormous volume of communication conducted over a wide array of platforms. “Business-related communications” can exist in the form of emails, voice mails, recorded phone calls, text messages, private messaging apps, and officially sanctioned business apps. To complicate things further, communications and communications channels are rarely solely business or solely personal. And many modern messaging apps, both private and business-sanctioned, utilize “ephemeral” messaging—a technology wherein sent-messages are automatically deleted from both the sender’s and recipient’s devices, as well as any server or storage systems, after the message has been viewed or after a set amount of time. But, many regulatory agencies require rigorous recordkeeping requirements in order to promote compliance and support regulatory oversight. This is particularly true for regulated entities like investment banks, broker-dealers, and investment advisers. Federal securities laws require certain brokers, dealers, investment advisers, and issuers of securities (which are sometimes referred to as “members”) to “register” with the SEC, which both helps to facilitate the regulatory scheme and subject those “registrants” to various other regulatory rules and requirements. In the realm of recordkeeping requirements, SEC Rule 17a-4(b)(4) requires registered members, brokers, and dealers to preserve, for at least three years, original copies of all communications sent and received by the registrant that relate to its business. Registrants are expected both to ensure institutional-level compliance with recordkeeping requirements and to maintain reasonable measures to supervise compliance amongst employees, or else risk facing enforcement actions.

Over the past four years, under Chair Gensler’s oversight, the SEC has focused heavily on finding and curbing the use of “off-channel” electronic messaging platforms, such as WhatsApp, that are hosted on employees’ personal devices or otherwise outside of registrants’ monitored communication channels, for business-related communications. Together with the Commodities Futures Trading Commission, the SEC has fined over 100 investment advisers and broker-dealers in the past three years, often charged as part of broad “sweeps” of multiple entities at once, for more than $3 billion in aggregate fines. According to the SEC, recordkeeping requirements “are an integral part of the investor protection function of the Commission, and other securities regulators, in that the preserved records are the primary means of monitoring compliance with applicable securities laws.”

Since communications sent and received on off-channel platforms are generally not monitored and preserved, the SEC’s position has been that the use of these platforms likely deprives the SEC of records registrants would be required to produce in connection with any SEC information request or investigation. The SEC has maintained this is true even where the Commission has not otherwise initiated an investigation or found evidence that relevant communications were left out of a response to a subpoena. And even where registrants do have policies prohibiting off-channel communications for conducting business, if employees have been able to ignore these rules and used off-channel messaging apps anyway, the SEC has often still penalized the entity for failing to implement a system sufficient to reasonably assure that institutional policies and federal regulations were being followed.

However, despite the industry-wide SEC crackdown, use of off-channel messaging has continued to persist in the securities market. Now, after President-elect Donald Trump’s victory earlier this month in the 2024 U.S. Presidential Election, a new chair of the SEC will be appointed in the coming weeks and months to succeed Chair Gensler. And early indications suggest that Chair Gensler’s successor may be less likely to take up the reigns of the war on unmonitored communications.

For starters, both Republican appointees who currently sit on the SEC—who are themselves considered potential candidates to replace Gensler—have been on record criticizing the off-channel communications enforcement cases. In September 2024, Commissioners Hester Peirce and Mark Uyeda issued an official statement opposing the SEC’s continued insistence on using enforcement actions to combat off-channel communications, concluding that “it does not appear that firms have an achievable path to compliance.” Peirce and Uyeda argued that the recordkeeping rules in effect were the product of “simpler” times before the evolution of electronic communications and that applying these arguably dated rules to today’s communication trends is further complicated by the fact that many conversations which used to be conducted orally (and that would not have been captured by recordkeeping requirements) are now being transmitted electronically (and therefore subject to recordkeeping expectations). As Peirce and Uyeda put it: “One needs only observe a couple teenagers sitting in a room together who are texting one another rather than talking to each other to realize that texts have taken the place of what would have been oral communications in the past.” Rather than continue attempting to whip the industry into compliance with penalties and investigations, Pierce and Uyeda advocated for partnership with the securities industries on modernization and reform of the recordkeeping rules.

Outside of the SEC, some Republican-leaning advocacy groups have also levied criticism against the trend of enforcement actions centered around off-channel communications. In January 2023, a coalition of trade associations, including the U.S. Chamber of Commerce, the National Venture Capital Association and the Investment Company Institute, wrote a letter to Chairman Gensler outlining their concerns that the SEC has been engaging in “rulemaking by enforcement” and exceeding its authority by consistently seeking evidence of any off-channel communications through its information requests and investigations.

Finally, President-elect Trump’s own rhetoric on the campaign trail has consistently reflected support for American business and de-regulation. For example, in remarks made to the New York Economic Club in September, then-candidate and former President Trump said, “One of the keys to unlocking growth is scaling back years of disastrous regulations unilaterally imposed by our out-of-control bureaucracy. Regulations have grown into a massive, job-killing industry, and the regulation industry is one business I will put an end to.”

In light of these signals, we believe the next head of the SEC (whoever it is) is likely to wind down enforcement actions revolving solely around off-channel communications and substantially deprioritize investigation of off-channel communication practices as a focus of the agency. This is not to say, however, that the SEC will simply ignore issues associated with off-channel communications altogether. Commissioners Peirce and Uyeda and the aforementioned coalition of trade associations all acknowledged in their statements that preservation of books and records in compliance with the SEC rules is critically important to market integrity. The reality is that many business communications are taking place on off-channel platforms and it very well may be that the next SEC chair will take steps to address the need to preserve them. But we expect the agency to pivot towards a strategy of producing compliance through improvement and the modernization of the regulatory framework, rather than the current SEC’s decision to use investigation and enforcement as the main catalyst for reform.

That said, the industry will ultimately need to wait and see who is selected to lead the SEC. And, if the SEC does decide to pursue reforms to the recordkeeping requirements, that process may involve a request for significant input from the securities industry. Registrants are encouraged to work closely with counsel to stay apprised of new developments as the landscape develops, and they continue to review and monitor their own policies and practices for ongoing compliance.

¹Ephemeral Messages, LEAP XPERT Glossary, https://www.leapxpert.com/glossary_term/ephemeral-messages/

²15 U.S. Code § 78l(a) (registration of securities); 15 U.S. Code § 78o(a) (registration of brokers and dealers); 15 U.S. Code § 80b–3(a) (registration of investment advisers).

³17 C.F.R. § 240.17a-4(b)(4).

⁴See Section 15(b)(4)(E) of the Securities Exchange Act, codified at 15 U.S.C. § 78o(b)(4)(E) (making it unlawful to fail to reasonably supervise another person who commits a violations of the securities statutes and regulations); 17 C.F.R. § 23.602(a) (“[e]ach swap dealer and major swap participant shall establish and maintain a system to supervise, and shall diligently supervise, all activities relating to its business performed by its partners, members, officers, employees, and agents”).

⁵James Palmer, Trump’s SEC Likely to Halt ‘Off-Channel’ Texting Probe That’s Led to Billions in Fines, The Nat’l Law Journal, Nov. 19, 2024, https://www.law.com/nationallawjournal/2024/11/19/trumps-sec-likely-to-halt-off-channel-texting-probe-thats-led-to-billions-in-fines/?kw=Trump%27s%20SEC%20Likely%20to%20Halt%20%27Off-
Channel%27%20Texting%20Probe%20That%27s%20Led%20to%20Billions%20in%20Fines&utm_source
=email&utm_medium=enl&utm_campaign=newsroomu
pdate&utm_content=20241119&utm_term=nlj&oly_enc_id=9563F9085134F2D&slreturn=20241119155609.

⁶Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 17 C.F.R. Part 241, Exchange Act Rel. No. 44238 (May 1, 2001).

⁷Rebecca Fike, Jake Beach, and Jacob Mathew, Don’t Forget the G: After Years of “Environmental” and “Social” Regulations and Enforcement, the SEC’s Recent Priorities Demonstrate a Focus on “Governance”, Vinson & Elkins Regulatory Roundup, Nov. 4, 2023, https://www.velaw.com/insights/dont-forget-the-g-after-years-of-environmental-and-social-regulations-and-enforcement-the-secs-recent-priorities-demonstrate-a-focus-on/.

⁸Hester M. Peirce & Mark T. Uyeda, A Catalyst: Statement on Qatalyst Partners LP, SEC Newsroom, https://www.sec.gov/newsroom/speeches-statements/statement-peirce-uyeda-qatalyst-09242024.

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¹²Letter from certain Trade Associations to the Hon. Gary Gensler, dated Jan. 31, 2023, re: Investment Adviser Recordkeeping Requirements, https://www.sifma.org/wp-content/uploads/2023/02/Investment-Adviser-Recordkeeping-Requirements.pdf, at 2–3.

¹³Remarks provided by Donald Trump to the New York Economic Club, Sept. 15, 2024, available at https://www.youtube.com/watch?v=92Gx6NAZPsM.

¹⁴See supra note 6; supra note 10 at 2–3.