Advisor Texting, Likely DOL Fiduciary Rule in Focus This Year

The Securities and Exchange Commission’s regulatory agenda “shows no signs of letting up,” with several rules that “advisors should pay particular attention to,” according to Sara Crovitz, partner at Stradley Ronon in Washington.

The Labor Department is also likely to deliver on a new fiduciary rule this year, Crovitz said.

Industry trade groups are raising concerns about an ongoing sweep by the SEC of advisors’ off-channel communications, including text messaging and other electronic communications.

The groups told SEC Chairman Gary Gensler in a recent letter that the sweep exceeds the agency’s authority because, according to news reports, the SEC has asked each of the investment advisors “involved in the sweep to have the personal phones of several employees imaged and reviewed, and that the SEC seeks evidence of any off-channel business communication, regardless of its nature.”

The SEC exam priorities list “that came out earlier this week said off-channel communications were priority for 2023,” Crovitz said.

We caught up with Crovitz — a former deputy chief counsel at the SEC who now specializes in  all aspects of investment company and investment advisor regulation — to get her thoughts on what’s looking to be a very active regulatory year.

THINKADVISOR: Any thoughts on the SEC’s off-channel communications sweep, in what’s being called the “WhatsApp sweep”?

SARA CROVITZ: In September 2022, the SEC settled with 16 financial firms, mostly broker-dealers, with fines over $1 billion with regard to allegations that firm employees were routinely communicating about business matters using personal email or text messaging applications on personal devices, where the communications were not captured by the firms’ record-keeping systems.

I understand that both broker-dealers and investment advisors have received the sweep.

And [SEC] Exams has added as a priority for its program for 2023 reviewing both investment advisor compliance and recordkeeping around electronic communications, so there’s no sign this issue is going away soon.

What other regulatory hot topics should be on advisors’ radar this year?

The first is the outsourcing proposal, which came out in October. The rule would prohibit as fraudulent registered investment advisors’ outsourcing certain services or functions, which could include commonly used ones such as recordkeeping, investment risk software or trading services, unless the advisors conduct a prescriptive, one-size-fits-all due diligence and monitoring process.

The proposal seems like a solution in search of a problem — advisors have been using third-party service providers for years and already are fiduciaries to their clients and responsible for the services within scope of their advisory agreement whether outsourced or not.

Despite the now-common short comment period, the SEC received almost 100 comment letters, many of them quite critical of the proposal — in particular, it’s not at all clear how any incremental benefits could possibly outweigh the costs of the proposal given the lack of evidence of any real problem.

Another is a proposed amendment to the investment advisor custody rule, which the SEC will consider on Feb. 15.

The advisor custody rule was amended after the [Bernie] Madoff scandal, and defines custody extremely broadly, which has led to some perhaps unintended consequences.