Expert Q&A: How recent SEC & CFTC enforcement actions impact financial services

Expert Q&A: How recent SEC & CFTC enforcement actions impact financial services

On the heels of recent SEC and CFTC enforcement actions related to digital communication channels, Hearsay hosted a panel with subject matter experts Bill Simpson, Compliance Principal at Hearsay, and Ed Wegener, Managing Director of Governance, Risk and Compliance at Oyster Consulting. Together, they discussed trends in enforcement actions, why policies that focus on prohibition are being deemed ineffective, and how firms should prioritize their next actions in light of increased scrutiny. 

Read highlights from their conversation below:

How has supervision of digital communications evolved? How will it continue to evolve in the future?

Both experts pointed out that the requirement to supervise, preserve and maintain written communications has always been in place, but it has become more challenging for firms to keep up as channels of communication have evolved and increased exponentially.

Regulators have always taken the stance that any channel that cannot be captured, supervised, and maintained must be prohibited. However, Ed pointed out that prohibiting and enforcing bans will continue to be a challenge for firms: “A lot of these channels are the preferred communication methods for advisors and clients and continue to be, more and more, the preferred methods. It becomes very challenging to simply prohibit that.” 

How do regulators expect firms to adapt?

It's incumbent on firms to determine how they're going to adapt to the various digital communications in use by clients and advisors. However, regulators don't expect perfection, but rather a reasonable set of policies and procedures. These should govern the types of communications allowed and prohibited, and show that firms have a way to maintain them, and a way of identifying whether any prohibited communication channels are being used.

What are firms doing to figure out who’s not using the compliance solution? 

Bill shared a few strategies that firms are using to ensure compliance, ranging from manual to automation-enabled processes. Unsurprisingly, manual strategies—such as setting up Google alerts and employing off-label uses of social listening—were not endorsed as being effective in finding violations. He recommended an executive sponsorship strategy wherein leaders embrace the policy themselves by not only talking about it, but pushing people to use that channel while also enforcing disciplinary actions.

Ed emphasized that above all, regulators expect firms to proactively identify red flags. “If you just say, ‘We're going to prohibit it, and then put your head in the sand, that's not going to be compliant,” he noted. Referencing the recent cases, he noted that among the warnings that were missed was the use of unapproved or prohibited channels by executive leadership. 

Ed also underscored that firms need to create a culture that enforces existing prohibitions, which means not only having policies and procedures, but also requiring attestations and regular training. “You need to set that culture where we have these policies…[and demonstrate] these policies are important; we're enforcing these policies. If you can show that, I think it'll go towards the regulator saying that you have a reasonable system in place,” he said. 

What can be learned from the recent investigations that have resulted in enforcement actions?

Enforcement actions are very costly and often go beyond monetary fines. Ed reminded us that “an enforcement action is a reputational hit and adds to reputational risk. But also, they generally come with significant remediation requirements.” Firms are advised to be proactive and take reasonable steps to ensure compliance with prohibitions.

Bill added that while much of the focus from the news has been around advisors communicating with retail investors via texts, inter-office communications should not be ignored. Especially in today’s remote working environment, these communications won’t always take place over email. Case in point: One intercompany chat resulted in several different investigations at the same time. Regulators are zeroing in on all communications over texting—not just those with retail investors, so having a compliant channel that can accommodate this type of communication is crucial.

How should firms prioritize their next actions in light of this increased scrutiny?

More firms are moving toward allowing common types of communications—finding it to be more effective than trying to prohibit channels that their people want to use—and are working with vendors to come up with compliant solutions. Firms that are still opting to prohibit certain types of communication channels should ensure they’re enforcing consequences and proper documentation for non-compliance, as well as requiring regular attestations.

Overall, going over policies that have not been updated for a while is a great place for firms to start and re-establish a baseline for today’s ​​regulatory landscape. For more insights and tips on how to best prepare your firm against increasing regulatory scrutiny, please reach out to

Sydni Green
As Hearsay’s Social Media Marketing Manager, Sydni oversees organic and paid social media strategy to ensure an engaging, insightful, and positive experience for Hearsay's followers. With an educational background in creative writing and film studies, Sydni enjoys a good story, and is always happy to give a movie or book recommendation.

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