Off-Channel Communication Tops Investment Adviser Compliance Focus

Communication done outside of work channels is the top compliance focus area among investment advisories, followed closely by the SEC’s marketing rule, according to the results of an annual survey released Tuesday by the Investment Adviser Association, ACA Group and Yuter Compliance Consulting.

In a survey of 595 investment adviser firms overseeing services ranging from defined contribution retirement plans to private funds, 59% of respondents said the “hottest” compliance topic was “electronic communications surveillance/off-channel communications.”

The topic beat out adviser focus on the Securities and Exchange Commission’s marketing rule (57%), which went into effect in November 2022 and prohibits the use of testimonials and endorsements in advertising.

Artificial intelligence and the use of predictive analytics “debuted” at number three, with 46% of investment advisers calling it a top compliance issue, according to the report.

This is the first time in three years that the marketing rule did not rank as the top concern in the survey, with firms no doubt taking notice of recent SEC actions regarding off-channel communications. 

“The increasing focus on off-channel communications underscores the need for robust electronic surveillance strategies to mitigate risks and safeguard client data,” said Carlo di Florio, ACA’s global advisory leader, in a statement. “Investment advisers who prioritize compliance, conduct mock exams, and embrace industry best practices are better positioned to navigate the complexities of today’s regulatory environment.”

In February, the SEC charged 16 firms, including investment advisers and broker/dealers, more than $81 million to settle charges for failures to maintain and preserve electronic communications with clients made via personal text messages.

“As described in the SEC’s orders, the broker-dealer firms admitted that, from at least 2019 or 2020, their employees communicated through personal text messages about the business of their employers,” the regulator wrote. “The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws.”

In April, the SEC announced its first off-channel charges against a registered investment adviser, fining Senvest Management LLC $6.5 million for allegedly communicating “about company business” in personal text messages.

The other hot topics “aligned with the SEC’s exams, enforcement and rulemaking priorities,” according to the report writers. Those included, in order of response:

• 37% cybersecurity;
• 16% private funds;
• 10% conflicts of interest;
• 8% vendor due diligence;
• 8% environmental, social and governance;
• 6% anti-money laundering; and
• 6% books and records.
  
  

The survey also found that 83% of respondents have been examined by the SEC in the past five years, with the top examiner focus areas being: 1) books and records (58%); 2) advertising and marketing (57%); and 3) conflicts of interest (50%).

When it comes to mock testing among firms, respondents’ focus areas tended to align with the hottest topics, at least at the top. The most tested among firms was, in order: 1) electronic communication surveillance/off-channel communications (73%); 2) advertising/marketing (65%); 3) cybersecurity (57%); 4) vendor due diligence (44%); and 5) books and records (36%).

“These top areas are in line with SEC rulemaking and enforcement focus areas reflecting a proactive industry,” which is a continuing trend over the last several years, according to the report by the industry advocacy groups. “Also, the majority of respondents did not decrease testing in any area.” 

The 19th annual Investment Management Compliance Testing Survey was conducted in May with 595 investment adviser firms.