Large industry players were among the firms recently fined by the SEC and the Commodity Futures Trading Commission for noncompliance with off-channel communication regulations. The fines totaled more than $477 million for pervasive recordkeeping failures, the commissions reported in August. To better understand the regulatory landscape and help firms ensure compliance, SmartBrief sat down with Michelle Jacko, founder of compliance consultation firm Core Compliance.
SmartBrief: What are some common reasons investment managers fail to comply with off-channel communications regulations?
Michelle Jacko: Complying can be challenging for quite a few reasons. First, with the increase of remote working today, employers more commonly allow the use of personal devices for business communications. This practice has created challenges in how business communications on employee personal devices are captured and maintained.
In addition, in fast-paced financial environments, the pressure to respond to clients or colleagues quickly may lead employees to use unauthorized communication methods, such as texting or messaging apps, without considering the regulatory implications.
Lastly, there are so many communication platforms available, it can be hard for firms to track and control which platforms are being used for business communications. Without being able to identify which off-channel platforms employees are using, it is challenging to establish the necessary policies, procedures and internal controls to effectively capture, archive and monitor business-related communications.
SB: What is at stake for firms that fail to comply?
MJ: First and foremost is the threat of significant financial fines and penalties from regulators. Since 2021, the SEC, FINRA and the CFTC have charged scores of firms and collected civil penalties of $3.2 billion for recordkeeping failures. Firms found to be non-compliant can also suffer severe reputational damage, leading to a loss of client trust, which can be particularly damaging in the investment management industry where trust and credibility are paramount. Non-compliant firms will also likely need to invest in corrective measures such as implementing new communication monitoring and retention technologies, and training staff, which can be costly and disruptive to business operations.
SB: What is driving regulators’ recent enforcement actions related to off-channel communications?
MJ: A few key factors include:
- The increased use of digital communication. The widespread use of digital communication platforms like messaging apps, social media and personal device use by employees has made it more challenging for firms to monitor and archive communications, as required by regulations. This trend has prompted the SEC to focus on ensuring that firms are adequately capturing and retaining business-related communications, pursuant to industry rules and regulations.
- Existing regulatory expectations. As technology evolves, the SEC expects firms to adapt their compliance practices to include retention and monitoring of those new platforms used for business-related communication.
- Maintaining market integrity. The SEC is concerned with maintaining market integrity and investor protection. By enforcing regulations around communication recordkeeping, the SEC aims to ensure that all firms are operating transparently and in accordance with the law, which is critical for maintaining trust in the financial markets.
SB: How have regulators changed their approach?
MJ: The SEC has ramped up its enforcement actions against firms that fail to comply with communication retention rules. This includes imposing larger fines and penalties on firms that “missed the message” on the importance of recordkeeping of “off-channel” communications (such as messaging apps and personal devices) and during examinations and investigations such communications must be made available to the staff.
SB: What are key steps investment managers can take to better monitor off-channel communications?
MJ:
- Implement comprehensive policies and procedures: Firms should establish clear policies that specifically address the use of off-channel communication platforms. This includes defining what constitutes official communication channels and prohibiting or strictly regulating the use of personal devices and messaging apps for business communications.
- Invest in monitoring and archiving technology: Investment managers should deploy technology solutions that can monitor, capture, and archive business-related communications on platforms authorized by the firm. Several electronic communication archiving providers now integrate with popular messaging apps, social media platforms, and personal devices to ensure that business communications are monitored in accordance with regulatory requirements.
- Regular training and awareness programs: Firms should regularly train employees on the importance of compliance with communication policies, including the risks associated with using off-channel communication tools. Employees should be made aware of the potential consequences of non-compliance, both for themselves and the firm.