Off-channel comms topple marketing rule as firms’ top compliance concern

Off-channel communications have topped investment advisors’ list of ongoing compliance concerns, dethroning the SEC’s Marketing Rule, according to new survey report.

The 2024 Investment Management Compliance Testing Survey took responses from 595 investment adviser firms of various sizes, with nearly a third managing more than $10 billion in assets and close to half having between 11 and 50 employees.

The survey, now in its 19th year, is a collaborative effort by the Investment Adviser Association, ACA Group, and Yuter Compliance Consulting.

According to the poll conducted online in May, three fifths (59 percent) of respondents viewed electronic communications surveillance and off-channel communications as the most pressing compliance issue.

"The increasing focus on off-channel communications underscores the need for robust electronic surveillance strategies to mitigate risks and safeguard client data," ACA’s global advisory leader Carlo di Florio said in a statement Tuesday.

Advertising and marketing, which was the most important compliance issue in 2023 polling, took second place this year, cited by 57 percent of participants. Artificial intelligence and predictive analytics debuted on the list at third place, with 46 percent.

Other notable compliance topics included cybersecurity, identified by 37 percent of respondents; private funds (16 percent); and conflicts of interest (10 percent).

A strong 83 percent majority of respondents have undergone an SEC exam or expect the federal regulator to come knocking within the next five years. Based on recent exams, the top areas of examiner focus were books and records (58 percent), advertising and marketing (57 percent), and conflicts of interest (50 percent).

In light of that, investment advisers are beefing up their compliance programs, with two-thirds (65 percent) having conducted or planning to conduct mock SEC exams. A substantial 85 percent of respondents agreed these mock exams were beneficial, helping them prep for actual SEC regulatory visits and identifying areas for improvement.

"Investment advisers who prioritize compliance, conduct mock exams, and embrace industry best practices are better positioned to navigate the complexities of today's regulatory environment," DiFlorio said.

The top areas of increased testing lined up fairly well with respondents’ top areas of concern, with electronic communication surveillance/off-channel communications (73 percent) and advertising/marketing (65 percent) taking top spots. Respondents also reported strong efforts to tighten up on cybersecurity (57 percent), vendor due diligence (44 percent), and books and records (36 percent).

Both the SEC and Finra have signaled their interest in keeping firms in line on AI. But based on the survey, the emerging technology isn’t on investment management firms’ compliance agenda – at least, not yet.

“Investment advisers are enhancing their compliance programs to address new regulations and risks as well as to maintain their focus on their bread-and-butter compliance functions,” said IAA president and CEO Karen Barr.