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The Expanding Scope of Regulatory Oversight on Off-Channel Communications in U.S. Financial Markets
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The Expanding Scope of Regulatory Oversight on Off-Channel Communications in U.S. Financial Markets

The enforcement actions by the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) demonstrate the agencies continued intense focus on off-channel communications, such as WhatsApp and other digital platforms, which have become a growing compliance risk in financial markets.

The SEC’s sweeps first focused on the largest broker-dealers, then quickly expanded in scope. Over the last four years, more than 100 entities have settled off-channel recordkeeping charges, including broker-dealers, dually registered broker-dealer/investment advisers, standalone investment advisers, and more recently credit ratings agencies, and municipal advisors. In September 12 credit-rating agencies where hit with a collective $88 million in penalties for failing to properly monitor and record their communications, and subsequently 12 municipal advisory firms were charged for failing to maintain and preserve key electronic communications, resulting in over $1.3 million in combined civil penalties. These last charges highlight that the SEC is increasingly focusing its attention on smaller financial firms.

These firms have been charged with, among other things, violations of the recordkeeping rules promulgated under the SEA of 1934 and the Investment Advisers Act of 1940. The settlements have included civil penalties ranging from five to nine figures (with nearly all in the many millions). The vast majority of settling respondents have also been required to retain independent compliance consultants (ICC) for multiyear engagements, a further significant expense. However, the crackdown is not isolated to the SEC or CFTC; rather, it signals the broader U.S. regulatory agenda aimed at preserving the integrity of financial markets.


Beyond the SEC and CFTC: A Broader Regulatory Crackdown

The issue of off-channel communications extends well beyond the realms of the SEC and CFTC. As highlighted by the Department of Justice (DoJ) and Federal Trade Commission (FTC)  recent guidance, there is a coordinated policy effort across U.S. regulatory bodies to enforce stricter rules around recordkeeping and communication  compliance practices. These rules are essential for integrity of financial markets and the ability of regulators to conduct thorough investigations. The broad regulatory sweep is not just limited to broker-dealers and investment advisers; it is expanding to include other critical financial market participants.

Implications for Asset Managers and Credit Rating Agencies

The expansion of scope underscores that the SEC’s enforcement is not confined to the traditional targets of Wall Street banks but is reaching all corners of the financial markets. For asset managers, the implications are profound. Unlike broker-dealers, the record-keeping requirements for asset managers have historically been perceived as less stringent. However, the SEC’s current stance suggests that this perception does not longer hold true. Asset managers are subject, under the SEC Investment Advisers Act Rule 204-2, to the same level of scrutiny as their counterparts in investment banking, leading to significant compliance challenges and financial penalties.

Similarly, credit rating agencies, which play a crucial role in the financial system by providing independent assessments of credit risk, are also under the microscope. The SEC’s forthcoming settlement with a nationally recognised statistical rating organization (NRSRO) show that such entities are again directly targeted in the off-channel communication sweep under SEC Rule 17g-2. This development signals that all regulated entities, regardless of their specific functions within the financial system, must adhere to stringent recordkeeping practices.

A Unified Regulatory Approach to Financial Integrity

The aggressive enforcement actions by U.S. regulators reflect a unified approach to safeguarding the integrity of financial markets. The emphasis on off-channel communications is driven by concerns that unrecorded and unmonitored conversations could undermine market transparency and hinder regulatory investigations. As the regulatory net widens, financial firms across the spectrum—from broker-dealers to asset managers and credit rating agencies—must recognise that off-channel communication practices are a central issue of compliance to come.

Preparing for the Future: Proactive Compliance Measures

In light of these developments, it is crucial for all financial market participants to reassess their communication compliance policies and ensure they have robust systems in place to monitor, archive, and review all forms of business communications, including those conducted on personal devices and messaging apps. The SEC has made it clear that self-reporting violations can lead to reduced penalties, which should incentivize firms to proactively address any gaps in their compliance programs.

Addressing the challenges posed by off-channel communications in the financial sector requires proactive compliance measures, including – but not limited to – technological integration that can capture and securely archive all communications in real time, ensuring compliance with regulatory standards and preventing data loss.

Implementing solutions such as our very own CC1 Messaging offers sophisticated capture, archive and search regulated communication data capabilities, enabling quick access to specific communications for audits and investigations.

The expansion of regulatory scrutiny into new areas of the financial sector serves as a stark reminder that compliance obligations are continuously evolving. Financial firms must stay ahead of these changes by embracing more sophisticated and comprehensive approaches to supervision and recordkeeping. Only by doing so can they navigate the increasing regulatory demands and maintain the trust of both regulators and investors in the long term.

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