Lawyer Breaks Down SEC's Sweep of Advisors' Texts

For the same reason, it is also unlikely the SEC will be more descriptive when it comes to defining "business-related" communication in future orders.

Historically, the SEC has been careful not to specifically identify or discuss the communications at issue in recordkeeping violations. For example, in one 2004 order relating to recordkeeping failures for internal email, the SEC did not specifically discuss the communication at issue and merely faulted the firm for failing to retain "'internal email' (email that was sent between only employees of the firm) that related to its business."

Are you hearing other firms will be part of the sweep?

Industry reports have noted that nearly two dozen investment advisors have received requests from the SEC related to their use of third-party applications and that several others were the subject of SEC investigations last fall.

We expect that numerous other firms have, or will, receive targeted inquiries regarding record retention. Record retention has also been a subject of examination requests from the Division of Examinations.

You mentioned how advisors and broker-dealers should prepare. One way was: Issue company-owned phones or company-managed phones. Is this happening a lot? Firms are doing this?

While we are not aware of any statistics surrounding firms issuing company-owned phones, there are certainly firms in the industry that require business-related communication to be conducted only on a firm-issued device. Instituting such a policy is one way to both provide an avenue for business-related communication while ensuring proper retention.

You also mentioned that the SEC is "shoehorning" Investment Adviser Act Rule 204-2 7(i), this business-related issue, into its orders. Can you explain that a bit more? 

The text of Investment Adviser Act Rule 204-2(a)(7)(i) requires preservation of written communication relating to "any recommendation made or proposed to be made and any advice given or proposed to be given."

As noted above, on its face, the Rule does not explicitly require the preservation of all business related communication and appears to be narrower than Rule 17a-4's requirement that communication related to "business as such" be preserved.

However, the SEC has routinely cited Rule 204-2(a)(7)(i) as requiring record keeping for communications related to a firm's "business, including investment strategy; discussions of investment banking client meetings; and communications about market color, analysis, activity trends or events" as well as "debt and equity underwriting and trading issues."

This suggests the SEC's has taken the position that nearly all communication related to the business of an investment advisor can be tied to a recommendation or advice given or proposed.

Are firms worried about their compliance with the off-channel communications issue or do they feel their policies are up to snuff in this area?

While the vast majority of firms likely already have a record retention policy, the September orders exposed fault lines in more traditional policies that may have historically been designed to focus on paper or email communications.

In its orders, the SEC noted that the firms maintained applicable policies, but that the policies were neither effective nor enforced. Effectiveness and enforcement of a firm's policy will likely be an ongoing focus of future SEC investigations and exams.

At this juncture, eight months after the September orders, most firms likely have reviewed and revised existing policies as necessary to comply with applicable rules.

Moving forward, it will be essential that firms ensure compliance with their policies through consistent monitoring and audits. Firms should also be prepared to update policies that may be ineffective in practice. Looking forward, firms should pay attention to changes in technology and communication methods in order to forestall future reviews by the SEC.

(Pictured: Hayley Trahan-Liptak)