Why the off-channel comms problem is far from solved

After facing years of hair-raising fines and penalties around recordkeeping violations, some RIA firms might take recent leadership and organizational changes at the Securities and Exchange Commission as a chance to ease up their compliance efforts.

But according to one compliance expert, that's exactly the wrong approach to take. 

"With the new SEC commissioner, there may be a slight pivot, especially when it comes to off-channel communications," Lilian Colpas, director and head of Investment Advisory Support at Compliance Risk Concepts, said in a recent interview with InvestmentNews.

Over the past several years, the SEC under Gary Gensler has conducted an aggressive campaign against recordkeeping violations, leading to billions of dollars in penalties for firms it said did not adequately oversee their advisors' use of unapproved messaging channels.

In one landmark action last August, the agency fined 26 firms a combined $393 million – including Ameriprise, Edward Jones, LPL Financial, and Raymond James & Associates – for reportedly widespread failures to properly monitor or document electronic communications. Shortly after in September, it announced an additional $88 million in recordkeeping penalties for a dozen firms.

Just before Gensler's January 20 resignation, the agency handed down another $63 million in off-channel communication fines to 12 entities, including subsidiaries of Blackstone and Apollo.

As even giant brokerage and Wall Street firms got caught in the SEC's dragnet, Colpas recalled how her own clientele of RIAs felt frustrated and handicapped in keeping track of employees' off-channel communications.

To try to meet the SEC's expectations, Colpas says her firm's investment advisory clients have been using quarterly attestations, with employees offering sworn declarations that they would not conduct business with communication channels that aren't approved by the form. Questionnaires provided another layer of cover, with employees being asked to indicate what channels they use in general for their communications.

"If you [as a firm] still had employees answering these questionnaires saying 'I use texting all the time,' now you'd want to try and curb that kind of use," she says.

Some client firms also use third-party vendors to keep track of their employees' emails, LinkedIn notices, and text messaging. But Colpas says every piece of compliance software comes with its own technical limitations.

"There really isn't one [compliance tech] vendor out there that can track [all] text messages or WhatsApp messages ... there are technical issues and operational issues," she says. 

While large hedge funds might have the budget to purchase dedicated work cellphones for their employees, Colpas says it's probably not a cost-effective option for smaller firms with less than a billion dollars in client assets. The upshot for those firms, she says, is a greater degree of risk from employees using their own devices.

With Paul Atkins now officially one month into his term as the new SEC chair, Colpas says firms may expect less of an enforcement impact around off-channel communications. Aside from Atkins' preference for common-sense regulation, she pointed to the disruption from federal downsizing efforts, which has led to thousands of employees leaving the agency as a result of buyouts, voluntary resignations, and regional office closures.

"The last few months, we've certainly seen a lot of staffing changes, and a lot of regional directors that have been reassigned," Colpas says. "Enforcement staffing numbers have been reduced, so I think everybody's realizing [the SEC's] not going to keep pace with any massive enforcement."

It remains to be seen how the SEC will proceed with a limited staff, but Colpas expects less heavy fining as the regulator takes a more measured approach, evaluating the risk of compliance breaches from employees using alternative communication channels.

"[Atkins believes] investors can benefit from efficient regulation, effective regulation, well-designed regulation. And I think that makes a lot of sense," she says, pointing to his opening statement during his April Senate confirmation hearing. 

With that outlook for less enforcement by the SEC, Colpas is concerned about firms dialing back their compliance around off-channel communications. But to protect their own investor clients from fraud and other risks, she's encouraging RIAs to hold the line.

"What I'm advising my clients is 'Don't just take a step back. Don't think it's going to be a free pass just because of all these changes,'" she says. "You still have a fiduciary duty under the Advisors Act to ensure your investors are protected ... You never know what's going to happen."