Navigating the SEC’s Path Toward Digital Modernization

By Robert A. Cruz, Vice President of Regulatory and Information Governance, Smarsh

Financial services regulations are starting to reflect the digital world we live in. At a recent oversight hearing, U.S. Securities and Exchange Commission Chairperson Paul Atkins announced that the commission is working on a formal electronic delivery, or e-delivery, rule and updating rules for off-channel communications. These changes are an indispensable step to bring outdated requirements in line with today’s fast-paced, data-driven environment for firms and investors.

The End of the Paper-First Era

For years, required disclosures and investor reports have usually been sent by physical mail, a practice that started long before smartphones and social media existed. The new e-delivery rule could make electronic delivery the standard for broker-dealers and advisers.

By shifting to a digital-first approach, the SEC is following the example of agencies like the Internal Revenue Service and the Financial Industry Regulatory Authority. Digital delivery makes the most sense as it is more efficient, saves money, is better for the environment, and matches how today’s investors prefer to get information.

Representative Bill Huizenga, R-M.I., pointed out during the hearings that this change is overdue. For firms, moving away from paper-based compliance should lower operating costs and make communication smoother, while also reducing the chances of problems with physical delivery.

Untangling the Recordkeeping “Crazy Quilt”

A bigger concern for compliance officers is the SEC’s attention to the “crazy quilt” of recordkeeping standards, as Atkins described the current patchwork of rules for different market participants. Whether a firm is a broker-dealer, rating agency or investment adviser, the lack of a single standard has caused confusion. Lawmakers and industry leaders are now asking if current requirements make sense, especially when they cover internal communications that do not clearly put investors at risk. When looking at updating recordkeeping rules, they’re taking into consideration what information should be retained and what activities can be done to mitigate the risks that employees are using unapproved tools.

Two main issues have made the demand for clearer rules more urgent: the growth of generative AI and the SEC’s own internal challenges. As firms use more AI in their work, it is harder to define what counts as a “business record,” and how best to capture this communication.

Additionally, the SEC has had its own issues with off-channel communications recently. It was revealed that almost a year of text messages from former Chairperson Gary Gensler’s government phone were deleted because of a misunderstood automated policy. The SEC conducted a review to determine what exactly happened, how the agency responded, and the effect this has on federal recordkeeping. This situation shows that regulators within both the private sector and government struggle with the current rules, illustrating the need for a system that is both practical and enforceable.

A Shift Toward Principles-Based Regulation

Although the details are still being discussed, the industry wants a “principles-based” approach. This would let firms decide which data to keep based on its importance to investor protection, instead of following strict rules that require saving every minor internal message. This approach coincides with the larger goal of making regulations simpler and emphasizing areas with the most risk. Another possible change would include making recordkeeping limited to only specific types of communications, such as those that are made with investors or external parties.

In the next few months, I expect the SEC to start the formal rulemaking process. This will include a proposal, a public comment period, and then final adoption. There is no set timeline yet, but Chairperson Atkins has told staff to make these changes a priority.

The Road Ahead for Firms

Broker-dealers and registered advisers should not use this waiting period as an excuse to do nothing. The large settlements in the past two years over off-channel communications show that the SEC is still strictly enforcing current rules. Firms should take this time to review their electronic communication policies, test their recordkeeping systems, and get ready for a digital-first disclosure model. Updating these rules is a positive step, but firms will need to actively update their compliance systems.

Robert Cruz leads the global regulatory and information governance team for Smarsh, a communications data and intelligence firm. The team’s primary objective is to help Smarsh customers stay apprised of regulatory developments and deploy best practices in the use of digital communications technology. Cruz is an author, speaker, and subject matter expert in the area of digital communications compliance and brings over two decades of leadership in the governance, risk, and compliance market. Based in the Silicon Valley area, Cruz holds an MBA degree from the Stanford University Graduate School of Business.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of AltsWire.

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