Electronic Communications and The Global Asset Management Regulatory Landscape

Since 2021, the SEC has fined financial services firms for inadequately documenting employee work-related electronic communications. These fines continue to be significant, even over $100M. Last month, the SEC announced charges against twelve firms for “widespread and longstanding failures” to maintain electronic communications.

Within the United States, The Advisers Act Rule 204-2 dictates investment advisers must maintain books and records as they relate to the investment advisory business. The rule specifically includes investment recommendations, the transfer or receipt of any fund or security, the execution of orders, and more. Additional regulations set forth standards around maintaining investment adviser “books and records” related to derivatives. Globally, the United Kingdom’s Financial Conduct Authority as well as standards set by MiFID II and GDPR have similar policy implications –investment advisers must ensure applicable communication remains both recorded and auditable. While the Monetary Authority of Singapore’s guidance is less clear, Hong Kong has cracked down on “non-discoverable” communication.

In conducting initial research, we spoke to buy- and sell-side representatives at various levels and positions.

• Persona One: Buy-Side Equity Analyst – “I would never utilize WhatsApp or other electronic communication methods in a professional capacity; however, I have several colleagues that do.”
• Persona Two: Buy-Side Compliance Officer – “While off-channel communication is discouraged, it is only completely banned within investment and operational teams.”
• Persona Three: Sell-Side Fixed-Income Trader: – “I never use any application for any type of correspondence that involves professional colleagues. We take this extremely seriously.”

In speaking with various stakeholders, we found that there was a bifurcation between standard operating procedure with the buy- and sell-side. On the sell-side, there appeared to be holistic understanding and little confusion that external communication via private applications was noncompliant. On the buy-side, personnel seemed less hesitant to utilize off-channel communications.

• Electronic Communication Vendors and Tools – Global vendors offer full-scale monitoring systems on both corporate and, potentially, private devices to ensure communication remains recorded and auditable. We address this below.
• Set Aside Cash – Some asset managers and investment banks have preemptively set aside pools of cash for potential enforcement actions, such as SEC fines. Proactively self-reporting could also reduce fines.
• The Concept of “Easily Discoverable” – Communication should not just be “discoverable;” it should be easily accessible. This means that a Compliance team should have no issue fielding questions from regulators.
• Remote Working – Firms have noted that external communication outside approved methods has been more rampant due to remote working.
• Most Restrictive Means – Global investment managers are often complying with the most restrictive regulations to ensure proper compliance programs. This principle could help align global programs.

Since asset managers must manage growing complexity and volume of electronic communications effectively, choosing a vendor to assist with this process could save time and resources. Prior to defining e-communications policies and procedures, asset managers should explore various vendor options, prioritizing those equipped with the latest communications compliance technologies. Leading vendors distinguish themselves by directly capturing content at the source. This ensures seamless access to messages and attachments in their original context on integrated platforms. Vendors should store content in immutable, regulation-compliant WORM (Write Once, Read Many) archives, adhering to requirements for retention, expiry, access, and management. These systems should maintain communications in a non-rewriteable, non-erasable format for a specified duration which depends on applicable laws and regulations. Additionally, the ability to export stored data to various archives and applications is crucial.

Today, vendors offer solutions that classify and index content at the point of capture and ingestion, enhancing advanced search capabilities. This classification can be based on pre-loaded policies or customized using firm-specific policies or key phrases. Regular updates to policy libraries and the ability to back-test new policies against historical data are crucial for maintaining relevance and efficiency. With effective classification and indexing, firms should be able to perform advanced search across all their data quickly and easily. We have seen an uptick of vendors leveraging artificial intelligence, machine learning, and large language processing to replace traditional sampling and lexicon search-based analysis. For audit and management information (MI) purposes, it is crucial that all communication data remains structured, enriched, and easily interpretable. This facilitates comprehensive reporting and efficient case creation for potential investigations.

Alpha has global experience supporting and instilling compliance and risk reviews as well as leading operating model changes across departments. The only way to truly tackle ensuring an asset manager’s ecosystem of personnel is utilizing communications properly by ensuring: 1) internal policies align with global regulation, 2) a proper culture of compliance, 3) maintenance of 1st, 2nd, and 3rd lines of defense, and 4) a comprehensive controls inventory. The potential problem needs a more holistic solution than what first might appear as the best course of action for an internal Compliance team.