FINRA Annual Conference 2024: Tackling Off-Channel Communications Compliance

May 22, 2024by Tiffany Magri

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As professionals in the financial services industry, staying on top of regulatory updates and best practices is more important than ever. I recently had the opportunity to attend the FINRA Annual Conference in Washington DC, where two key topics took the spotlight:

  • The ongoing focus on off-channel communications
  • The rise of artificial intelligence (AI)

This is the first of a two-part series in which I will provide my insights and actionable items to help your firm navigate these areas more effectively.

For discussions and best practices around AI, see part 2 here.

Off-channel communications: The regulatory focus continues

Regulators are doubling down on the importance of properly managing and overseeing off-channel communications. However, compliance teams continue to balance this with the needs of their businesses, as highlighted by polling questions during the event, where ⅔ of respondents said they allow the use of text messaging, and 60% support messaging apps. With the growing use of text messaging, WhatsApp, WeChat, and other channels, firms must be extra diligent in recordkeeping, supervision, and compliance with FINRA content standards (Rule 2210).

A second poll during the FINRA conference addressed how firms handle off-channel text communications. Around 40% of firms have their employees capture an image of the communication and upload it to an approved channel before calling the client. In comparison, 38% take it further by submitting the captured image for supervision. The key difference between these two points is that submitting the communication for supervision is crucial for demonstrating a commitment to compliance. As firms navigate the increasingly digital landscape, it's essential to remember that supervision is not optional but a vital component of any off-channel communication policy.

Recent enforcement actions show just how serious this issue is. Senior personnel engaging in prohibited communications, lack of adherence to policies and procedures, and insufficient surveillance and enforcement have all landed firms in hot water with the SEC and CFTC.

How to mitigate risks of off-channel communications

The standing-room-only audience at the conference indicated that firms continue to seek guidance from FINRA in determining a strategy to best address off-channel risks. So, what can your firm do to stay ahead of the game?

Here are some best practices that FINRA identified during the conference for consideration:

  • Spell out which communication channels are allowed and which are off-limits in your policies and procedures
  • Provide thorough training to ensure your employees understand and comply with the rules
  • Keep a close eye on employee role changes to maintain appropriate access and oversight
  • Be proactive in standardizing technology to tackle off-channel communication issues and streamline compliance

The art of defining business communications

Many firms still struggle to define "business communication." FINRA has not yet provided a clear-cut definition set in stone, leaving room for interpretation based on a firm's unique operating model and the nature of its interactions with clients and prospects. As one panelist at the FINRA Annual Conference aptly stated, "There is an art to defining business communications."

When establishing policies and procedures related to various communication channels, firms should:

  1. Carefully consider what types of communications fall under the "business communications" umbrella based on their specific business model and client interactions
  2. Ensure that their policies and procedures accurately reflect their definition of "business communications" and provide clear guidance to employees on what is permitted and prohibited
  3. Regularly review and update their policies and procedures to keep pace with evolving communication channels and regulatory requirements

Is the answer one-size-fits-all or made-to-order?

From our observations and discussions with industry professionals, it's clear that a one-size-fits-all approach to defining "business communications" is not practical. Each firm must consider its unique circumstances, including the types of products and services it offers, the nature of its client relationships, and the communication channels most commonly used in its business.

Moreover, firms should consider the need to retain and supervise communications beyond the standard regulatory considerations. This includes monitoring for potential human resources violations, such as bullying or sexual harassment, which can have significant legal and reputational consequences.

Additionally, firms must be aware of other regulatory requirements, such as the Department of Justice's Evaluation of Corporate Compliance Programs (ECCP), which may necessitate a broader approach to communication retention and supervision.

Tread lightly around off-channel communications

The challenges surrounding off-channel communications and the definition of business records persist, with firms actively seeking guidance on best practices. The regulatory focus on these issues extends beyond FINRA, emphasizing the need for firms to stay vigilant and adaptable in their approach. This problem has been around for a while, and it's not going away anytime soon. As new communication channels evolve and expand, firms must stay on their toes.

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Tiffany Magri
Smarsh Blog

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