Recently, the SEC hammered 16 firms a total of $81 million for failing to meet the recordkeeping requirements around electronic communications. The settlements mostly stemmed from tools like WhatsApp, a primary culprit of unmonitored or “off-channel” communications. 

These penalties were in addition to the nearly $3 billion in fines imposed by the SEC and the Commodities Futures Trading Commission (CFTC) since December 2021.

More On The Way 
To be sure, this isn’t the end of the fines, with other penalties being a question of when, not if. If nothing else, consider the sheer scope of all the sanctions thus far, not just the amount of money involved but the number of firms. It shows that WhatsApp and other off-channel communications platforms are and will remain a huge concern for regulators.

The other big issue is that many firms don’t have policies or procedures in place to deal with the overall trends underpinning the use of commonly used digital tools, much less emerging platforms gaining traction among consumers.

In a recent Smarsh survey, only 47% of respondents at wealth management firms said they allow texting as a communication tool. That approach is out of step with how most clients want to interact, whether with friends or service providers.

Additionally, more than 20% of firms that allow the use of encrypted messaging apps like WhatsApp do not have any governance policy covering them. These sorts of oversights are an invitation for trouble.

What distinguishes the most recent fines from the previous batch is at least one firm actively raised its hand and cooperated with regulators by self-reporting its violations. As a result, its fine was only $1.25 million.

Compare that to the levies other firms faced, which ranged from $8 million to $16.5 million, and it’s apparent that cooperation makes a huge difference. The SEC, in fact, explicitly called it out in its release announcing the settlements while also giving a nod to industry efforts to double down on recordkeeping, policies and procedure updates and supervisory practices.

The Proper Support 
Part of being cooperative—and ultimately solving recordkeeping-related problems—is having the proper communications surveillance solutions, including AI-powered offerings, to enhance existing oversight. Indeed, it’s hard to protect your business if you can’t identify every potential risks.  

In practice, this means firms must be able to monitor and capture all applications, even those that have not been approved for use. If it’s not clear by now, it should be: Prohibition, by itself, does not work. That’s because consumer preferences and the pace at which new technologies get adopted will always outpace a compliance professional’s ability to keep certain tools at bay.

But equally important is having the ability to identify when conversations are going off-channel. That’s where AI-enabled risk detection tools that track phrases like “message me on” or “let’s take this to” can pay huge dividends.

Features like this will allow firms to gain visibility into misbehavior and strengthen their ability to investigate activities on consumer applications. Notably, while WhatsApp continues to be a challenge for many firms, they should be prepared for scrutiny to shift toward other tools preferred by clients. The target will continue to move.

Scalable Solutions
With the industry prepared for more fines, the time has come for RIAs and broker-dealers to move the lower-hanging fruit of policy and training adjustments into a stronger position to impact the behavior and culture of their businesses. Deploying scalable solutions to surface risk allows firms to move forward to prevent violations that include failure to archive messages or to follow up on red flags.

Barring that, businesses in our industry will struggle to stay ahead of compliance challenges—which could result in massive financial penalties and significant damage to their reputations. 

Robert Cruz is vice president of regulatory and information governance at Smarsh, the global regtech leader for wealth management enterprises and financial institutions.