FINRA continues to send signals of its enforcement priorities for the balance of 2018. As a follow-on to its January Exam Priorities Letter, FINRA has just released Regulatory Notice 18-15 “Heightened Supervision” that would require firms to adopt heightened supervisory procedures for brokers with histories of past misconduct. Among its requirements are how firms should identify individuals for heightened supervision as well as how firms can develop and implement a heightened supervisory plan.
(By the way, the topic of high-risk brokers and activities is an interesting one, and has been subject to commentary not only from FINRA, but also the US Securities and Exchange Commission, and most recently the Financial Consumer Agency of Canada.)
FINRA 18-15 outlines that heightened supervision plans should include, at a minimum:
- Designating a principal with the appropriate training and experience to implement and enforce the plan;
- Requiring appropriate additional training for the associated person subject to the plan to address the nature of incidents resulting in the plan;
- Requiring the written acknowledgment of the heightened supervisory plan by the associated person subject to the plan and the designated supervisory principal;
- Periodically reviewing the heightened supervision plan to assess its effectiveness.
In addition to these minimum provisions, FINRA has seen need for heightened supervision plans that provide for review of the associated person’s business activities, as well as more frequent review of the associated person’s communications, particularly with customers. As the notice states:
“These programs serve multiple purposes in advancing FINRA’s mission of protecting investors and market integrity—including promoting compliance with applicable rules, creating a level playing field, and enhancing transparency and access to information. One of their most important purposes is to protect investors from bad actors: those who seek to evade regulatory requirements and harm investors for their own personal gain. FINRA continues to evaluate and augment its regulatory programs to better identify and supervise potential bad actors.”
Does Regulatory Notice 18-15 Go Far Enough?
FINRA’s Heightened Supervision requirement is a good start, but it offers little explicit guidance on how firms can tune their supervisory plans themselves after acknowledging that the motivation of some bad actors is to evade regulatory controls. The fact remains that supervisory systems were designed many years ago, and simply reviewing email communications more frequently is not going to yield more carefully crafted schemes that are designed to avoid detection. In order to improve the effectiveness in addressing Notice 18-15, firms should also consider the following:
- Ensure that communications policies are updated to reflect not only the current list of supported communications channels – but also limit or exclude access to specific communications tools for individuals meeting the high-risk definition.
- Regularly monitor the communications networks in use by registered representatives to ensure that only supported communications tools are being used. A variety of networking technologies are available to help here. Additional help may also be found via your teenage kids, many of whom are well versed in the latest disappearing, encrypted, and emoji-speaking apps.
- Examine how conversations happening over multiple communications networks are processed by existing supervisory tools. Jumping from one network to another (“channel hopping”) is a common tactic for those who are purposely attempting to mask conversations, which goes well beyond finding phrases like “let’s take this offline” in a supervisory review. Supervisory tools should have the ability to follow conversations, whether happening over email, IM, social media, or any other communications tool.
- Embrace content surveillance: uncovering high-risk broker activities may very well exceed the limits of traditional lexicon and keyword-driven review policies. Content surveillance allows firms to dig deeper into the discovery of patterns, anomalies, and additional actors that may have avoided existing supervisory filters.
How Can Smarsh Help?
Contact us to dive deeper into the data in order to help you capture the communications sources that matter, reveal the risks that may be hidden in your data, and enable you to respond more effectively to Regulatory Notice 18-15 and other critical compliance tasks.
Originally published on Actiance.com.