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FINRA provides guidance on off-channel communications in regulatory report

On Behalf of | Feb 5, 2024 | FINRA Compliance

The issue of off-channel communications was among the areas of concern addressed in the Financial Industry Regulatory Authority’s 2024 Annual Regulatory Oversight Report, according to Bloomberg Law.

The regulatory report provides member firms with insights and observations from recent activities of FINRA’s regulatory operations to help them strengthen their compliance programs.  This year’s report includes a section on regulatory obligations with respect to books and records, including guidance on retaining and supervising off-channel communications.

Firms are required to monitor and save employee communications involving their business and customers, but compliance became more challenging when many employees began working remotely during the COVID-19 pandemic.  The SEC then launched a probe into the use of unapproved outside messaging apps such as WhatsApp in the financial industry.  Dozens of firms have been fined by the SEC, FINRA and the Commodity Futures Trading Commission for violations in this area.

In its regulatory report, FINRA said that because off-channel communications occur on non-firm platforms or devices, there is an increased risk that they are not maintained and preserved as part of the firm’s books and records.  The authority asked firms to consider certain guiding questions when assessing whether their compliance programs are designed to supervise and maintain off-channel communications, such as:

Does your firm’s electronic communication policy include:

-procedures and controls to maintain, preserve and monitor all business-related correspondence by staff, including that which is conducted via off-channel communication methods;

-processes and procedures to monitor for new electronic communication channels available to customers and associated persons; and

-required training and guidance that your firm’s associated persons must complete before they are permitted access to firm-approved electronic communication channels?

FINRA also asked firms to consider how they monitor and surveil for compliance with the prohibition against using unapproved off-channel communication methods for business communications, and what disciplinary measures they have implemented to deter individuals from circumventing supervisory controls.

The applicable FINRA rules in this area include Rules 2210 regarding communications with the public, 3110 on communications supervision, and 4511 related to recordkeeping. Broker-dealers are also subject to SEC Rule 17a-4, which requires retention of communications relating to its business as such, as well as the technical controls for retention described in subsection 17a-4(f).

Regulators have increasingly been focusing on the risks involved on off-channel communications.  In October 2022, the SEC charged 15 broker-dealers and one affiliated investment advisor with widespread recordkeeping violations after finding widespread failures in maintaining and preserving electronic communications. The commission said employees with the firms routinely communicated about business matters through the use of text messaging applications on their personal devices, but the records of those communications were not properly preserved.

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