An important component of financial compliance for broker-dealers is establishing message archiving for all communications relating to its business. Not only is it required by FINRA, but it can protect your Firm if there is an employee conducting unethical or illegal business activities. In a communication from Smarsh, a participant in FINRA’s Preferred Pricing Program, they state that “Broker-dealers can avoid being penalized by regulators for wrong doing among individual professionals if they can clearly demonstrate that they are proactively and sufficiently capturing and monitoring all electronic communications.”
FINRA’s Archiving Requirements
The FINRA message archiving requirements are designed to protect the security, integrity and accessibility of financial information contained in email sent and received by financial services organizations. The archiving requirements for electronic communications can be found in the Books and Records Key Topic under the Rules and Guidance section of FINRA’s website, where FINRA states that broker-dealers are required to retain originals of all external and internal communications received and copies of all communications sent by the broker-dealer relating to its business for at least three years, the first two years in an easily accessible place. This requirement applies to all electronic communications relating to the firm’s business, including emails and instant messages.
FINRA does allow the use of non-firm email systems or accounts to conduct firm business, as long as all those communications are archived and adhere to the requirements listed above. FINRA does not permit the use of any type of electronic communication if a Firm is unable to satisfy the applicable record keeping requirements with respect to that particular type of electronic communication.
Communication Supervision
In order to stay compliant with the Message archiving requirements, Firms needs to establish a process for reviewing communications on a regular basis. This includes documenting the review process and being able to produce such documentation to regulators on request. The purpose of this is to ensure that firm executives and financial advisors are not committing wrongdoing, including unauthorized outside business activities, and to protect your Firm from any disciplinary actions taken against those individuals.
Heightened Supervision
FINRA Rule 3110 requires that Firms put certain associated persons with a history of past misconduct under heightened supervision. This includes more thorough reviews of their communications, especially communications sent to customers. Once an associated person with a history of past misconduct is identified, the Firm is required to create a separate set of policies and procedures for supervising that individual, and routinely evaluate those supervisory procedures to ensure they are appropriately tailored to the individual. For guidance determining which associated persons require heightened supervision, check out FINRA’s Notice on heightened supervision.
The Cost of Failing to Archive
Administrative Proceeding File No. 3-20050 details an enforcement action taken in September 2020 against a registered broker-dealer based in California, who failed to preserve business-related text messages sent or received by several of its registered representatives, including senior management, on their personal devices when communicating with each other, with firm customers, and with other third parties. This resulted in the Firm having to pay a civil penalty of $100,000.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. Also, if there are any areas where you would like to explore additional assistance or services, please contact us.