“Firms cannot realistically prevent all employees from using unapproved channels to communicate off-book securities business matters. What firms can do is set up reasonable supervisory systems to catch it.”
— John Lukanski, Partner, Reed Smith
Federal law requires financial firms to keep detailed records of electronic messages so regulators can ensure the firms aren’t breaking anti-fraud or antitrust laws. The Government expects firms to have and enforce compliance policies and monitor business communications to stop improper conduct from happening. The rapid emergence of mobile messaging apps and the necessity to shift to remote work due to the pandemic challenged this system. However, these challenges do not excuse any business from the need to ensure their communications remain compliant. This week, we explore how regulators are cracking down on this practice and consider how the banking industry can get proactive to mitigate this compliance risk.
Big Bank Messaging App Crackdown Exposes Policy Holes, Monitoring Struggles
U.S. financial regulators have signaled through an impending widespread enforcement sweep against Wall Street banks that they are zeroing in on employees’ unapproved uses of electronic communication channels to discuss business-related matters. Collectively, the cases emphasize the need for financial services firms to enhance their monitoring and recordkeeping obligations.
Finra Sanctions Two More Brokers Over Texting Violations
Last month, the Financial Industry Regulatory Authority issued two related disciplinary actions against two brokers based on allegations that they engaged in unauthorized texting with clients. One broker is working for Morgan Stanley, and the other, who had been with Ameriprise Financial, is barred from the industry. The Finra actions underscore an apparent regulatory crackdown on brokers using unauthorized devices or non-work applications to communicate with clients and coincide with a banking industry enforcement emphasis set by Wall Street regulators.
A Better Approach to Avoiding Misconduct
Financial firms still experience fraud and other forms of misconduct despite regulatory reform following the 2008 financial crisis. They have paid out more than $400 billion in fines over the past 12 years. The traditional approach to financial regulation of imposing formal rules and investing in a strong compliance function does not protect firms against excessive risk-taking and misconduct. Consider an alternative approach to compliance. Learn about an approach based on behavioral psychology principles that involve understanding human behaviors’ contextual drivers. Introducing small changes, or “nudges,” will help eliminate misconduct at the source.
Why the Banking Industry Needs to Proactively Identify Unapproved Communications Channels
In light of recent news, it is worth exploring what the banking industry needs to do to stop conducting business on unapproved communication channels. This is a prevalent problem that will continue growing with ongoing remote work and new ways to communicate digitally emerging frequently. As a result, when businesses are caught, the associated costs are high. It is clear from recent cases that banks can expect regulators to watch this closely and must prepare. The best way to ensure compliance with communications policies is to train employees on where they can communicate and the consequences of working outside those bounds.
