From Penalties to Practices: Decoding the SEC's New Vision for Communication Records
As we navigate the ever-changing world of financial regulation, it’s crucial to stay informed about the latest enforcement actions from the SEC. In 2024, we've seen the SEC ramp up its efforts with industry-wide sweeps, particularly focusing on off-channel communications. These sweeps are more than just a regulatory checkbox; they're reshaping how we think about day-to-day operations in our firms.
I've taken a deep dive into these enforcement actions, and I want to share some key insights that can help us all improve our compliance practices. Let's break down what the SEC considers a "record" when it comes to off-channel communications.
The quick take
Recent SEC enforcement actions on improper recordkeeping can give us a lot of insight into what the SEC expects from financial services firms. In this post, we examine how the SEC interprets or defines communication records based on the latest penalties.
A closer look at recordable communications
1. Trade execution and order management
We're seeing that even casual messages about trades are under scrutiny. For instance, a broker-dealer department head got flagged for discussing transaction terms with colleagues and external contacts. Even a quick text from a financial adviser to a client about executing a trade is considered recordable. Messages about the buying and selling of securities, as well as making offers and bids for securities, are recordable.
2. Investment advice and recommendations
This is a big one. Any communication about investment recommendations, whether a text to a client about buying or selling specific securities or a discussion about investment strategy, falls under the recordable category. And we must be especially careful with personal devices; the SEC noted thousands of text messages from senior officers at one RIA related to investment advice. Messages related to the potential impact of macroeconomic and regulatory developments on client funds' holdings and resulting investment advice are recordable.
3. Account management and documentation
It's not just about trades. Texts between colleagues about account documents, messages to clients about fund transfers, or internal discussions about using discretionary authority in client accounts – all of these are considered records. Communications about the receipt of funds from clients are recordable.
4. Performance reporting and analysis
We must be mindful that discussions about portfolio performance, whether with clients or among staff, are recordable. This includes casual texts about security recommendations or off-channel communications about performance presentations. Messages related to the performance or rate of return of managed accounts, portfolios, or securities recommendations are recordable.
5. Internal strategy and business discussions
The SEC is looking at how firms communicate internally about the business. Whether a senior executive uses WhatsApp or other communication platforms to discuss trading strategies or a director messages colleagues about potential deals, all of these interactions are considered records. Discussions and operationalization of investment strategies related to certain securities and trades are also recordable. Additionally, messages concerning strategy related to platform partnerships are regarded as records.
6. Client relationship management
Any communication with clients about their accounts or potential investments is fair game. This includes messages about fund deposits, proposed investment advice, or market updates. Off-channel communications where clients request securities transactions or discuss the placement and execution of orders are recordable.
7. Regulatory and compliance matters
Interestingly, even our internal discussions about regulatory exams, compliance reviews, and industry-wide changes are considered recordable. Firms must ensure that these conversations are happening on approved channels.
8. Deal and transaction information
For those in investment banking, be aware that messages about merger negotiations or IPO pricing, even if they're just between colleagues, are recordable. Communications about the strategy and terms for potential merger and acquisition transactions are considered records.
9. Retention and deletion practices
This is critical – we can't let convenience override compliance. The SEC flagged instances where senior officers had auto-delete settings on their personal devices and where employees weren't copying business messages for retention. We need robust policies and training to help prevent this.
What to keep in mind
The landscape of regulatory compliance has shifted dramatically. What might have seemed like innocent, off-the-cuff communications in the past could now pose significant risks to your firm. It's crucial to approach every business-related conversation, regardless of the platform, as a potential record that needs to be preserved.
Here are important things to keep in mind after reviewing recent enforcement actions:
- The scope of what's considered a "record" is incredibly broad, and almost any business-related communication could fall under this umbrella
- It's the content, not the platform, that matters — whether it's a text, WhatsApp message, or LinkedIn post, or even collaboration platforms, if it's about business, it's likely recordable
- This applies to both internal and external communications
- Everyone's involved — from junior staff to C-suite executives — and the latest actions show pervasive off-channel communications at all seniority levels
- Client interactions, especially about their accounts or investments, are always recordable
- Discussions about our firm's operations, strategies, or regulatory matters need to be preserved
- Any communication about trades, deals, or transactions is a record
- Performance discussions and analysis are included
- Compliance-related communications are definitely on the SEC's radar
Compliance with these regulations isn't a one-time effort, but an ongoing process. Let's commit to regularly reviewing and refining our communication practices, ensuring we're always aligned with the latest regulatory expectations and industry best practices.
It's worth noting that the SEC has shown leniency towards firms that self-report violations and take prompt remedial action. In recent cases, some firms that self-reported their recordkeeping violations were not fined by the SEC. These cases highlight the importance of proactive compliance measures and the potential benefits of self-reporting when violations are discovered. The SEC's approach in these cases demonstrates that cooperation and swift corrective action can significantly impact the outcome of regulatory investigations from reduced fines to now no fines.
Share this post!
- The AI Balancing Act: 2024 FINRA AI Guidance on Juggling Innovation and Compliance - November 1, 2024
- From Penalties to Practices: Decoding the SEC's New Vision for Communication Records - October 29, 2024
- SEC's 2025 Examination Priorities: Key Takeaways on AI, Crypto and Cybersecurity - October 25, 2024
Smarsh Blog
Our internal subject matter experts and our network of external industry experts are featured with insights into the technology and industry trends that affect your electronic communications compliance initiatives. Sign up to benefit from their deep understanding, tips and best practices regarding how your company can manage compliance risk while unlocking the business value of your communications data.
Ready to enable compliant productivity?
Join the 6,500+ customers using Smarsh to drive their business forward.
More Resources
Watch it Work
Contact Us
Chat
Subscribe to the Smarsh Blog Digest
Subscribe to receive a monthly digest of articles exploring regulatory updates, news, trends and best practices in electronic communications capture and archiving.
Smarsh handles information you submit to Smarsh in accordance with its Privacy Policy. By clicking "submit", you consent to Smarsh processing your information and storing it in accordance with the Privacy Policy and agree to receive communications from Smarsh and its third-party partners regarding products and services that may be of interest to you. You may withdraw your consent at any time by emailing privacy@smarsh.com.
FOLLOW US