The biggest audit and disciplinary trend that has emerged this year is how regulators are approaching electronic communication record keeping and supervision. The National Futures Association (“NFA”), Commodity Futures Trading Commission (“CFTC”), and Security Exchange Commission (“SEC”) have disciplined dozens of firms for shortcomings in this area. In fact, since 2021, more than a billion US dollars in civil penalties have been levied.  Some of the biggest, most well-resourced firms have been caught up in this movement. The list includes, but is certainly not limited to, Interactive Brokers, Nuveen, Fifth Third, Bank of Montreal, Wells Fargo, and many others.

The most common reason for firms to run into trouble with electronic communications occurs when existing policies and procedures are not followed. For example, it is relatively common for companies to ban the use of personal cell phones, third party chat applications, and other social media-based platforms. However, in practice, such policies breakdown when there is no form of supervision in place to monitor this. Now for some tough questions.

Supervisory and Record Keeping Assessment

Consider your firm for a moment. What are its electronic communication policies? Are they in writing? If a broker exchanges mobile text messages with a client on a personal cell phone is this a violation of policy? Are these types of communications captured and stored by your firm? If they are, is anyone reviewing this material? What if the broker uses his personal cell phone to call a client? Is the call required to be recorded? If yes, where is this call stored for record keeping purposes and how would it be reviewed? How about if a customer asks a broker to communicate with them through a third-party chat application. Is the broker permitted to do this? If yes, how does your firm capture these communications and review them? Do you require the use of only company email? If so, do you ever see members of your team communicating from personal accounts? What type of scope do you utilize when considering how to conduct reviews and how do you document this? How do you document the reviews themselves?

Broker Attestations and Working from Home

Working from home may be a tremendous benefit. It can however become a compliance nightmare when it comes to electronic communications and record keeping. How is your firm doing in this area? Typically, if brokers are permitted to use personal devices these devices must be registered and approved by the company. Communications from these devices must also typically occur in specific ways so that it can be properly monitored. To work from home your firm should have in place an approval process in the form of a waiver that staff must sign. This waiver should specifically address items such as cybersecurity at home, utilizing only approved communication channels, and ensuring the location would not qualify to be registered as a branch office. Regulators are recommending attestations be signed by staff acknowledging adherence to company policies on a quarterly basis. Do you have this process in place at your firm?

Applicable Regulations

CFTC Regulation 1.35 addresses record keeping obligations for industry communications. NFA Rule 2-10 and Interpretive Notice 9037 also explain what is expected. When was the last time you looked at these regulations? Turnkey has written about electronic communication supervision obligations many times. You can find articles on this topic in the resources section of our website.

Applicable Articles and Cases to Consider

Turnkey has written about electronic communication supervision obligations many times. You can find articles on this topic in the resources section of our website. We would strongly encourage you to revisit this content or to contact us if you have concerns in this area.