Should the SEC Ease the Communications Rule?

Is that a personal call? Eh, whatever.

Under former chair Gary Gensler, the Securities and Exchange Commission zeroed in on rooting out off-channel communications and improper record storage. But with a new administration in charge, a major Wall Street trade group is urging the agency to rethink rules it calls “burdensome, costly and unnecessary.” During the Biden years, the SEC reached nearly 100 settlements for record-storage violations, totaling over $2.2 billion in penalties, according to the Securities Industry and Financial Markets Association.

SIFMA asked the SEC last week to modernize and narrow its Communications Rules, arguing the current framework is too broad and outdated as technology evolves. “Communication has substantially moved away from paper toward e-mail, text messaging, message boards, social media and other electronic platforms,” SIFMA wrote in a letter to SEC Chair Paul Atkins.

With the current SEC already taking a much more business-friendly approach than it did during the last presidential administration, potential changes could provide advisors with a little more leniency in how they communicate with clients.

Just Chill

SIFMA — which represents asset managers, banks and brokerages — said the broad interpretation of the rule has created excessive compliance burdens without improving investor protection. The group proposed several reforms, such as:

• Excluding trivial exchanges such as emojis, “I’m running late” messages or other immaterial correspondence.
• Omitting items like AI-generated meeting transcripts that SIFMA says aren’t true communications.
• Standardizing a three-year retention period for all client communications, instead of the current three years for broker-dealers and five for investment advisors.

“Regulators are focused on protecting both clients and advisors, but sometimes non-sensitive communication via text should not be a fineable offense,” said Tom Balcom, founder of 1650 Wealth Management. “With clients expecting 24/7 access to their advisors, they often feel that texting is acceptable even after we have stressed to them that off-channel communications are frowned upon.”

Way Ahead of You. Cracking down on off-channel communications was a hallmark of Gensler’s SEC, alongside heightened crypto oversight and ESG disclosure efforts. Last August, the agency fined 26 broker-dealers and RIAs a combined $392 million for “long-standing failures” to maintain proper electronic records. In a final push this January, it charged a dozen firms — including Charles Schwab and Blackstone — $63 million over client conversations held on personal devices or apps.

However, as of this summer, SEC enforcement claims were down nearly 50%, with the majority of the cases dealing with clear-cut investor fraud as opposed to communications and record storage. So it seems like SIFMA may already have a friend in Atkins.