By Ludo Rubin, Director of Product MarketingThe 2020’s have been a busy time for financial services companies. Increasing regulation and enforcement of the sector is battling it out with the changing nature of a post-pandemic workplace, leaving these organizations under increasing pressure to find flexible solutions for rigid compliance requirements.
Broker-dealers are perhaps working in the eye of this storm – they have strict regulations regarding services they can offer, how they advertise products, and advice or recommendations they can (or can’t) give, and they have to carefully document and store all communications between employees and customers. The proliferation of personal and work devices that employees use to conduct business along with the explosion of electronic communication platforms such as WhatsApp, Telegram, and Zoom is making this harder to do effectively and is leaving these companies at risk.
At the same time, regulators are becoming more concerned, and therefore more vigilant, about this type of record-keeping. In late 2021, the Securities and Exchange Commission (SEC) began an inquiry to determine how financial institutions were monitoring and preserving work-related communications on their employees’ personal devices. What followed was a slew of charges against 16 financial services firms, many of them broker-dealers, who were fined more than $1.8 billion for failure to preserve employee communications.
This blog will look at the most significant challenges broker-dealers face regarding monitoring and storing employee communications as well as some of the solutions that can assist in this process and help these companies avoid the onerous penalties for violating these regulations.
Communication Monitoring and Archiving for Broker-Dealers
Maintaining complete and accurate “books and records”’ is a statutory requirement of operating in the financial services sector, and regulators have long established that all electronic communications, including personal emails, text messages, and chat room conversations constitute “books and records.” Therefore they have to be kept and produced on demand.
The rules that dictate the capture and retention of electronic communications differ from country to country, further complicating an already very complicated issue. However, the US Financial Industry Regulatory Authority (FINRA) has established some clear industry requirements. These include:
- Create and maintain a record of all policies and procedures established for compliance.
- Maintain originals and copies of all communications for at least three years, including emails and instant messages from broker-dealers.
- In the first two years, the records must be stored in an easily accessible place and must be kept where they originated.
- Companies must be able to produce or reproduce captured electronic records on demand and in the format requested.
- Companies can’t use any type of electronic communication that they are unable to monitor, store, and access in accordance with regulatory requirements.
FINRA is clear that obligations under these rules depend on the content of the communication not the mode of communication – if it contains information about business, the regulations apply, regardless of how the communication occurs or on what device.
Penalties for Violating Broker-Dealer Compliance Requirements
If a broker-dealer violates these regulations, they can be subject to penalties and fines, and in more serious cases suspension or revocation of their licenses and even criminal charges.
While the amount of the fines depends on the severity of the violation and the circumstances surrounding the non-compliance, precedence has shown that they will be onerous. For example, in December 2021 the SEC fined J.P. Morgan Securities, a broker-dealer subsidiary of JPMorgan Chase, $125 million for failing to preserve business-related text messages. Employees often communicated about business on their personal devices, using text messaging applications such as WhatsApp and personal email, and none of these were monitored or stored.
In another case, FINRA issued a $1.5 million fine to a company for failing to supervise its employees’ business-related text messages – despite having a policy in place that prohibited employees from using text messages to conduct or discuss business matters. In this case, two senior managers also received fines and were suspended.
These are just two examples in a long list of similar cases which make it clear that regulators are taking communication monitoring and mobile communication archiving very seriously. It is also apparent that simply banning these off-channel communications will not work. Instead, companies have to find a way of managing them.
Challenges in Communication Monitoring and Archiving for Broker-Dealers
Aside from the increasingly regulated and vigilant landscape and the proliferation of off-channel communication, there are additional challenges broker-dealers are facing in their attempts to become compliant.
Mobile and electronic communication is going to continue growing as a preferred way of doing business. This means that the volume of communications is going to keep increasing, as will the number of different platforms available to customers and employees. This complexity will make managing and archiving all of this data a significant undertaking.
Data security and privacy continue to be a challenge for any company that collects personal information from clients, and this is even more so for broker-dealers who make use of sensitive financial data. Given the rate at which cybercrime is growing, keeping clients’ financial information secure will continue to get more difficult. Companies need to invest in technology that can both monitor and archive communications, while also keeping this data safe.
An added challenge for broker-dealers is the need to keep up with increasingly sophisticated technologies. Moving to completely digital and automated solutions will be the only way to meet the regulatory requirements of the sector, and organizations need to be looking at these options and reducing their reliance on any manual processes.
Mobile Archiving Solutions for Broker-Dealers
Investment in new technologies is an essential part of enabling broker-dealers to manage the strict and growing regulatory requirements for mobile communication storage. With a wide range of archiving solutions on the market, what should broker-dealers be looking for in a software platform? Some of the key features include:
- Cross-platform compatibility: An effective solution has to support multiple operating systems across the full range of communication platforms. It also needs to be able to adapt quickly to accommodate new applications emerging in the market.
- Automated archiving: A suitable solution will minimize the amount of human intervention needed to create records. It should be able to automatically capture and archive all relevant mobile communications data, including phone calls and electronic messages without having to rely on an employee’s cooperation.
- Secure storage: The right archiving solution should use secure, encrypted storage to protect against data breaches and other security threats. It should also assist the organization in ensuring that personal information is not improperly shared.
- Search and retrieval capabilities: In order to be able to produce documents quickly as is required by the regulations, the archiving solution should use advanced search tools and filters to make searching and retrieving data easy.
- Customizable retention policies: Given the very specific requirements for the retention of communications data, software should allow broker-dealers to set customizable retention periods.
- Audit and reporting capabilities: Archiving solutions should provide detailed audit trails and reporting capabilities to support regulatory compliance and internal monitoring.
Best Practice Principles for Communication Monitoring
FINRA and the SEC have compliance checklists that specify exactly what companies should be doing to remain compliant. Some of the principles for best practices include:
- Develop a comprehensive communication policy: This should define what channels of communication and practices are permissible and which are prohibited, the measures used to prevent unauthorized communication methods, as well as the disciplinary framework in place to address issues of non-compliance.
- Train employees on proper communication practices: Companies should provide mandatory training to employees where they are made aware of the types of communication that are subject to monitoring and archiving and the consequences of non-compliance.
- Regularly review and analyze communication data: This is done to identify potential compliance issues and correct non-compliant practices.
- Automate communication storage where possible: This reduces the risk of human error and the time and effort required to manage communication data.
Streamlining is the Only Way
Given the huge amount of complexity involved in communication between employees and customers and the urgent need to remain compliant with regulatory requirements, broker-dealers have to find a way to streamline the data collection and storage process. Finding the right broker-dealer compliance services and mobile archiving solution is the best way to achieve this.
LeapXpert’s cutting-edge, mobile-first platform offers an intuitive user interface, allowing users to communicate confidently through the world’s most popular messaging applications. Our platform empowers employees to instantaneously communicate from within a unified and secure environment to clients or external parties using their preferred consumer messaging application — anytime, anywhere. All communication is governed and managed at an enterprise level in line with regulatory compliance and privacy requirements.
For more information on The LeapXpert Communications Platform and to schedule a demo, contact LeapXpert today.
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