The ongoing investigation by the Securities and Exchange Commission into unapproved electronic communications has yielded eye-watering fines, sending tremors through firms across the country.
Ameriprise and LPL are both on the hook for $50 million for compliance failures in keeping records of advisors’ and employees’ electronic communications, such as text and WhatsApp messages.
And they’re not the only ones. Top broker-dealers Cambridge Investment Research, Northwestern Mutual Investment Services, and Lincoln Financial Advisors were among 16 wealth management firms that previously agreed to pay $81 million collectively to settle charges brought by the SEC.
The regulator wants big, important firms like LPL and AMP to wake up, take this behavior in hand, and cut it out. Now. But while the SEC’s intent is clear, its method of calculating the penalties is less so. One executive told InvestmentNews that there’s “no rhyme or reason” behind these penalties, adding: “It’s a bit of a black box at the SEC over this.”
It’s a critical issue. The crackdown represents the latest meeting point of two pressures weighing heavily on advisors in 2024 – the desire to be approachable and tech-savvy, and the need to meet regulatory standards.
On the face of it, it’s easy to feel sympathy for advisors. The world operates on smartphones and communication is quicker and easier than ever. The pandemic simply supercharged this. Tapping into this speedway of dialogue, such a central part of life in 2024, gives advisors direct access to clients and the chance to deepen these relationships – two things they crave.
But trigger-fingered messaging of this kind is not compatible with money management. Off-channel communications away from a dealer’s platform can’t be monitored and recorded effectively. This poses endless conflicts.
Such messaging opens up security risks around confidential information and could expose clients to fraud (just look at how the SEC itself was hacked in January), while a lack of record keeping could mean client instructions are lost or forgotten, leading to potentially calamitous mistakes in their account. Importantly for advisors, no “paper” trail means they may not have the evidence to defend themselves against a client complaint.
Given the risks involved, advisors must foster client relationships through less trendy, but compliant, communications channels. Making these appealing to clients is a challenge wealth firms must embrace. That requires more work than pinging someone on Facebook, but explaining your lack of frivolity on this issue could – and should - engender trust among prospects that you are the right person to manage their money.
Given the seriousness of these violations and the SEC’s obvious determination to stamp them out with large fines, the regulators should also provide clear guidelines about how they’re reaching these numbers. After all, record keeping is about transparency and integrity, and that starts at the top.
Firms in New York and Arizona are the latest additions to the mega-RIA
The agent, Todd Bernstein, 67, has been charged with four counts of insurance fraud linked to allegedly switching clients from one set of annuities to another.
“While harm certainly occurred, it was not the cataclysmic harm that can justify a nearly half billion-dollar award to the State,” Justice Peter Moulton wrote, while Trump will face limits in his ability to do business in New York.
Sieg, 58, was head of Merrill Wealth Management, left in 2023 and returned that September to Citigroup, where he worked before being hired by Merrill Lynch in 2009.
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