Regulators: Hold On to Digital Communications!

Securities regulators are monitoring vigilantly for supervision and recordkeeping of digital communications, and as such firms should expect examiners to scrutinize policies and procedures and recordkeeping controls around these communications in their next regulatory examinations.

“Recordkeeping violations may not grab the headlines, but the underlying obligations are essential to market integrity and enforcement,” said Gurbir Grewal, director of the Securities and Exchange Commission’s Division of Enforcement, in a recent speech about broker-dealer regulation and enforcement.

“You need to be actively thinking about and addressing the many compliance issues raised by the increased use of personal devices, new communications channels and other technological developments like ephemeral apps,” Grewal said.

Some firms began permitting the use of digital communication technologies during the COVID-19 pandemic and may not have put in place necessary policies and procedures or may need to update their policies to address new digital communications methods.

Sound policies and procedures will enable firms to identify and respond to red flags. They should be clear as to what digital communication methods are permissible for use in business-related communications.

For example, the policies and procedures should clarify the firm’s position on the use of social media; text or instant messaging applications; audio and visual conferencing applications and the use of chat features within those apps.

Also important is that the policies and procedures address electronic recordkeeping, as the retention of retail and institutional communications must be in a format that complies with SEA Rule 17a-4, even those communications that are digital in nature.

Hefty Regulatory Fines

Reuters recently reported that the SEC has opened an inquiry into how Wall Street banks are keeping track of employees’ digital communications.

“SEC enforcement staff contacted multiple banks in recent weeks to check whether they have been adequately documenting employees’ work-related communications, such as text messages and emails, with a focus on their personal devices,” Reuters reported, citing three people familiar with the matter who spoke on the condition of anonymity.

Regulators have demonstrated a willingness to hold firms responsible for recordkeeping violations.

The Commodity Futures Trading Commission recently fined one firm $500,000 for failing to retain certain required audio recordings. The provisionally registered swap dealer deleted more than 1,000 hours of audio data after one day, including voice-recording files that were required by CFTC regulations to be retained for one year, the CFTC charged.

FINRA recently updated its frequently asked questions about its advertising regulation, FINRA Rule 2210, in part to address supervision of public appearances like when registered reps meet with groups via online conference platforms.

During a live, unscripted online conference, firms should supervise presentation components like visual aids, whiteboards, chats or instant messaging features based on the nature and number of persons attending the meeting, according to FINRA.

The use of such visual aids may be correspondence, retail communications or institutional communications, and the firm must supervise them as such, regulators say.

If, for example, in an online meeting with more than 25 retail investors, a representative were to use an online platform’s whiteboarding feature to draw a diagram as an answer to an investor’s question, then the content would be considered a retail communication.

Though the firm would not be expected to have had the content approved before use since it was a response to a question, the firm would have to retain the communication. Similarly, when a firm records a video conference, it becomes a record that must be maintained.

FINRA senior staff further addressed online platforms and the expectations for using them during a webinar held after the regulator updated the FAQs for its advertising regulation. Staff essentially stated that if a firm cannot supervise a communication method, then it should prohibit it instead.

Supervising digital communications properly includes retaining them correctly. Regulators are watching firms closely to ensure that they do both.

Margie Webber currently serves as a regulatory director of compliance focusing on BD/IA issues for RegEd. RegEd is a provider of licensing and registration technology and outsourcing services, broker-dealer compliance management solutions and training and continuing education for financial professionals.