LeapXpert The past decade has been colored by global economic uncertainty. A host of factors such as the COVID-19 pandemic, market fluctuations, and political instability have all contributed to a tense and watchful financial sector.
Perhaps one of the biggest contributors to this general sense of unease is the upheaval caused by questionable practices of financial firms and brokers. From the Mortgage Foreclosure Crisis of the 2000’s to Ponzi schemes and insider trading – it is clear to see why we are now in an era of heightened oversight and supervision of financial firms and their employees.
The Financial Industry Regulatory Authority (FINRA) is one of the main bodies in the US tasked with protecting investors and maintaining the integrity of the securities market. They do this by regulating and supervising financial firms and professionals. While their scope is limited to the US, their influence is global, and they often lead the way for other countries wanting to self-regulate their financial industries.
This is a challenging role given how rapidly work practices are changing. FINRA has to be able to close the gaps in past non-compliance while simultaneously identifying new problems that are emerging. For example, electronic messaging platforms such as WhatsApp are shifting the ways in which brokers communicate with their clients and within their firms, making recordkeeping a growing challenge.
Keep reading to find out how FINRA is tackling this problem, the consequences faced by violators, as well as what firms can do to stay on the right side of this trend.
Understanding FINRA Rules and Compliance
In order to fulfill its mandate, FINRA establishes and enforces rules and regulations governing the behavior and activities of its member firms and associated individuals. Two rules that are under close scrutiny at the moment are FINRA Rule 4511 and FINRA Rule 2010.
FINRA Rule 4511 relates to the requirements for accurate and complete recordkeeping by member firms. It states that members must maintain thorough books and records of all pertinent activities, including communications, and lays down the standards and regulations they are expected to follow.
This rule is particularly significant because it is the only way FINRA can ensure that firms are complying with appropriate business standards,and can identify when violations of trade regulations are occurring. It is also the main way that investors can be protected as proper recordkeeping provides a historical trail of client interactions and helps to resolve any discrepancies or conflicts that may arise.
FINRA Rule 2010, often referred to as the “Standards of Commercial Honor and Principles of Trade,” rule serves as a cornerstone of ethical conduct for brokers in the securities industry.
There are two main aspects to this rule. The first relates to ethical conduct and includes the need for all members to conduct their business with integrity and honesty. It highlights the importance of transparency and trustworthiness. The second concerns the fiduciary duty that brokers owe to their clients, requiring them to prioritize the client’s interests above their own. It emphasizes the importance of providing suitable recommendations, ensuring fair pricing, and avoiding conflicts of interest that may compromise the clients’ welfare.
These two rules work closely together – all members are supposed to act with integrity and ensure that they are transparent in their dealings, while effective recordkeeping is the mechanism through which this is monitored and supervised.
As electronic communications channels proliferate and brokers are able to communicate with clients across a number of platforms and devices, maintaining records (and ensuring ethical behavior) is becoming increasingly complex. At the same time scrutinizing broker behavior is a growing imperative and FINRA is raising the heat over employee’s use of Whatsapp to communicate with clients.
The Risks of WhatsApp Use in Brokerage Activities
FINRA made its position regarding the use of WhatApp very clear as early as 2017. InRegulatory Notice 17-18 they stated that financial firms must keep records of business communications that are made through any text messaging or chat apps such as WhatsApp. The notice states “…every firm that intends to communicate or permit its associated persons to communicate, with regard to its business through a text messaging app or chat service, must first ensure that it can retain records of those communications…”
The wording of the notice makes it clear that if a firm doesn’t have any way of ensuring that WhatsApp messages can be captured and retained, employees are not permitted to use them to communicate regarding business matters.
This creates a dilemma for FINRA members because simply prohibiting employees from using WhatsApp is not working.
Clearly,WhatsApp is the preferred choice of communication for a large proportion of the population, far outperforming SMS’s and other similar platforms. Brokers will face pressure to communicate on the client’s preferred platform, rather than asking them to move to a channel they don’t regularly use. This means that it is highly probable that business communications will take place over WhatsApp, regardless of a firm’s mandate.
And FINRA is not having it.
This has been clearly illustrated by two recent cases where brokers were personally penalized for using WhatsApp to conduct firm business.
The Cases of Roman Meyerhans and Delaina Kucish
Roman Meyerhans, a broker of 20 years standing, wasfound guilty of violating FINRA Rule 4511 and Rule 2010by exchanging hundreds of business-related WhatsApp messages with 12 customers. The messages included investment recommendations, client orders, and comments on market conditions.
Meyerhans had been caught using WhatsApp two years prior, and his firm issued a warning letter reminding him of their prohibition against using unapproved electronic messaging platforms, of which WhatsApp was one. Despite having agreed to comply with the terms in the letter, he continued using WhatsApp to communicate with his clients, while attesting to not doing so during compliance checks.
FINRA fined Meyerhans $10,000 and suspended him for 30 days – a hefty consequence especially when taken in conjunction with the damage to his reputation this event resulted in.
Similarly,Delaina Kucish, a former financial advisor, accepted a 15-month suspension and a fine of $15,000 after being caught using her personal cell phone to send business-related messages via WhatsApp. The firm had a clear rule against using ‘off-channels’ for communications, which Kucish violated.
Lessons Learned and Best Practices
FINRA is stepping up the pressureon its member firms and employees to comply with its regulations regarding messaging channels. Companies have a choice – find a way to properly capture and archive e-communications across personal and business devices, or become more effective at rooting out employees that violate a no-use order.
As can be seen from the cases discussed, messaging platform bans may actually just be unworkable and are likely to become more so in the future. The question should then be how can financial firms integrate modern communication platforms such as WhatsApp with FINRA’s record-keeping requirements.
Technology that allows companies to properly capture and retain WhatsAppand other off-channel communications is available and is likely to be the path of least resistance, and the customer-preferred route, to record-keeping compliance.
Regardless of the route taken, firms should ensure they follow best practices by ensuring that:
- They establish written rules and supervisory procedures that specifically address the use of messaging apps.
- All business communications (and attachments) made using messaging apps should be captured and retained.
- They have systems in place to monitor and review messaging app communications, or, if it is prohibited, whether employees are complying with this.
- They have rules or systems in place to separate personal and business devices and communications. Either personal devices need to have a way of registering business communications, or they must be prohibited for business use.
- They establish policies that prohibit certain activities on messaging apps, such as sharing non-public or confidential information.
Messaging In Your Business: An Urgent Priority
Messaging channels are here to stay, and it is clear that the financial industry has to put mechanisms in place to manage its use. Prioritizing compliance by implementing effective recordkeeping systems seems to be the most desirable route, making it convenient for clients and helping brokers to remain on the right side of industry regulations. Finding the right software solutions provider is critical to making compliance easy.
The LeapXpert Communications Platform allows FINRA-regulated financial institutions to ensure compliance with record-keeping regulations by capturing and recording conversations between employees and clients. Our user-friendly dashboard allows for easy auditing and reporting and displays the real-time status of all messages, conversations, and data sent, as well as flagging when conditions and rules have been breached. Integrated with leading third-party archiving, surveillance, and analytics platforms, all messaging records are securely stored and available alongside all the existing business data.
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