Off-Channel Communications Now Advisors' Top Compliance Concern

Two new compliance surveys named unapproved messaging channels as the topic of the moment.

Advisors’ No. 1 concern has shifted from complying with the Securities and Exchange Commission’s new Marketing Rule to off-channel communications surveillance, according to a just-released 2024 Investment Management Compliance Testing Survey, released by the Investment Adviser Association, ACA Group and Yuter Compliance Consulting.

When asked to choose three top compliance topics among 50, the survey found that the “hottest” compliance topic for 2023, identified by 59% of the 595 survey respondents, was electronic communications surveillance/off-channel communications.

Indeed, in a recently released Global Relay survey of financial services firms, 65% of respondents said that getting employees to comply with rules for off-channel communication was their biggest compliance challenge.

The SEC has fined financial firms more than $3 billion for employees’ use of unapproved communication channels, like WhatsApp and text messages on personal phones, and more fines are expected to come.

On the list of hot topics, advertising/marketing came in a close second, cited by 57% of respondents, and AI/predictive analytics debuted in third place, with 46% of respondents including this on their list.

The top areas of increased compliance testing include:

Other hot topics generally aligned with the SEC’s exam, enforcement and rulemaking priorities, according to the survey findings.

These key focus areas included:

“The increasing focus on off-channel communications underscores the need for robust electronic surveillance strategies to mitigate risks and safeguard client data,” ACA’s Global Advisory Leader Carlo di Florio said in a statement. “Marketing, artificial intelligence (AI), cyber, and vendor oversight are other key hot topics investment advisers are testing and grappling with. 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.”

SEC Exam Prep

The 2024 survey, conducted online throughout May, also found that the industry is focused on SEC exams, with 83% of respondents reporting that they are undergoing an exam or have been examined in the past five years.

The top examiner focus areas in recent SEC exams were reported as: books and records (58%), advertising and marketing (57%), and conflicts of interest (50%).

Investment advisors are enhancing their compliance programs, with 65% having conducted or intending to conduct a mock SEC exam, for example, as well as increased testing, the survey reports.

“A significant portion of respondents (85%) reported that a mock exam prepared them for an actual SEC exam and identified issues and best practice enhancements,” according to the survey.

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