Reform, Not Fines: The SEC Needs a New Approach to Off-Channel Communication

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The Securities and Exchange Commission closed out its fiscal year with an announcement of charges against 10 firms in their capacity as broker-dealers and one registered broker-dealer and investment adviser for their failure to comply with the Books and Records requirements of the Federal Securities Laws.

These laws (specifically, Rule 17a-4(b)(4) of the Exchange Act and Rule 204-2(a)(7) of the Advisers Act) impose a broad requirement that a broker-dealer and investment adviser retain all communications of relevant employees while in their professional capacities. This enforcement action represents a long-standing effort by the SEC to crackdown on off-channel communications resulting from continuous employee communication through popular and modern messaging and texting platforms such as iMessage and WhatsApp.

Of course, the use of unmonitored communication channels underscores the need for recordkeeping requirements, however that doesn’t justify the actions of the SEC to merely impose a fine and move on. Rather, the rise in off-channel communication violations highlights the need for the SEC to adapt to changing times and more recent communication technologies as it evidently shows that traditional regulatory measures are not fully effective in addressing the challenges posed by modern messaging platforms.

The SEC itself recognized that the use of off-channel communication platforms is pervasive within the financial industry. The Commission, however, fails to recognize that the pervasiveness does not necessarily stem from individuals intending to violate the Act, but simply from the convenience and effectiveness that such communication platforms offer. iMessage and WhatsApp offer easy and effective means through which broker-dealers and executives may conduct business. These platforms are used daily and on a worldwide scale; they are used for essentially every matter.

The SEC’s enforcement actions resulting from these violations are completely understandable in that they are, in part, efforts to safeguard the agency’s ability to exercise effective regulatory oversight. However, the SEC should be looking beyond these violations and to the root of the problem: the rise in technology. Rather than forcing these firms to pay for employing a modern, technological approach to communication, it should be focusing on adjusting its guidelines for digital recordkeeping in order to conform to the present era’s standards.

Ever since the COVID-19 pandemic, there has been a significant trend of working from home. As a result, many business-related text messages went untracked and unrecorded and thus the SEC enforcement actions resulted. However, it is undisputed that the “work-from-home” trend is likely to continue and perhaps even increase among broker-dealers and investment advisers who require only a computer and WI-FI to conduct business.

Work-From-Home Here to Stay

Bloomberg reported that just 20 percent of financial-services companies require that their employees come into the office five days a week, and two out of three banks offer full flexibility regarding their work schedule or some sort of hybrid work arrangement. Clearly the concept of remote work is not a trend but rather a common and permanent practice in today’s age. Popular communication platforms such as Zoom and Microsoft Teams are likely to only increase in use. This comes to show the everlasting effects that the pandemic had on the workplace and the standards of communication used by virtually every corporate firm. The SEC must recognize this clearly permanent change in the modern-day workplace and adjust its regulations to fit its demands.

Many will argue that although SEC’s regulations regarding off-channel communication are outdated, it would be impossible to implement changes that allow the agency to oversee actions that indicate unlawful behavior by brokers such as price fixing, insider trading, and manipulative trading practices. However, just as modern communication platforms pose an issue to the SEC, it also offers a solution. Some instant messaging platforms have begun to add features aimed at professional organizational industries, such as those designed to ensure compliance with the communication retainment requirement. Slack offers a good example of this.  Slack is a messaging app for businesses that strives to connect people to information. The company recognizes the need for record retainment and as a result implemented a feature that allows businesses to export conversations and retain them for eDiscovery purposes.

The SEC should look towards companies such as Slack as a representation of the ability ensure compliance with the Books and Records requirement all the while supporting modern technological developments. This is not to say that such a platform will completely deter broker-dealers from fraudulent behavior or communicating through off-channel communication platforms, as there will always be private alternatives. Employees communicate over iMessage or WhatsApp simply because it’s a common habit, given recent generational trends. However, by offering a regulatory alternative that is both capable of complying with record retainment requirements and conforms to the modern-day standards of communication platforms, firms will be more willing to comply with the SEC requirement, while maintaining an approach to off-channel communication used by broker-dealers for the purpose of conducting business.  

Jacob Horowitz is a J.D. candidate at the Benjamin N. Cardozo School of Law at Yeshiva University in New York.