Trade Groups Push Back on SEC Recordkeeping ‘Sweep’

Investment associations say in a letter that the SEC is exceeding its authority by asking to access all off-channel business communications of investment advisers.

In a joint letter led by the Managed Funds Association, 10 investment and business industry trade groups responded to the Securities and Exchange Commission’s request to access shops’ off-channel business communications.

The letter comes in response to reports first detailed by Reuters that the SEC is conducting a sweep on the international communications of investment advisers after settling with a number of investment banks.

In September 2022, the SEC charged 15 broker/dealers and one investment adviser for “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications,” such as the use of unauthorized messaging services like WhatsApp. The firms agreed to pay collective penalties of more than $1.1 billion.

In the recent letter sent on January 31, MFA was joined by group industry representatives, including the U.S. Chamber of Commerce, Investment Company Institute and the American Securities Association, among others.

“We are strongly concerned that the SEC is attempting to exceed its authority under the Advisers Act and engaging in rulemaking by enforcement through its current sweep regarding off-channel communications,” wrote Jennifer Han, executive vice president, chief counsel and head of regulatory affairs for the MFA.

In the nine-page letter, Han laid out various arguments against the SEC’s order. Under the Investment Advisers Act of 1940, the statutory and regulatory framework are narrower for investment advisers than for broker/dealers, she argued. However, the SEC’s order suggests investment advisers be held to the same broad recordkeeping requirements as broker/dealers for business communications.

The SEC did not immediately respond to a request for comment.

In its prior settlement disclosure, the regulator said firms violated federal securities laws by “failing to maintain and preserve required records relating to their businesses.”

“These actions deliver a straightforward message to registrants: You are expected to abide by the Commission’s recordkeeping rules,” Sanjay Wadhwa, the SEC’s deputy director of enforcement, said in the announcement.

In the industry letter, the MFA’s Han argued that the SEC is attempting to turn instances of noncompliance into violations of the Advisers Act. To be consistent with the modified statutory requirements, firms would need to adopt policies that limit recordkeeping obligations. Additionally, Han wrote, “[the SEC] also ignores the plain text of the Compliance Rule, which requires that investment advisers adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act.”

The letter also stated that the Commission’s approach to off-channel communications would violate the privacy of individuals.

“The process of collecting communications from personal devices is extremely invasive,” the letter stated. “This process can result in the imaging and collection of sensitive personal data, such as medical information, passwords, or financial information.”