FINRA’s Lens on Off-Channel Communications: 6 Tips to be Exam Ready

May 22nd '23

Smarsh has got some exciting news for you straight from this year’s Financial Industry Regulatory Authority (FINRA) Annual Conference. Brace yourselves, because this year FINRA is turning its spotlight on those oh-so-interesting off-channel communications (prediction right!). We’re talking about those sneaky little messages that happen outside your financial firm’s approved channels.


In one of the sessions, they learned potential examination priorities for off-channel communications. During an exam, FINRA will inquire about various aspects related to off-channel communications, aiming to gain a comprehensive understanding of a firm’s practice and identify potential red flags.


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It’ll be a wild ride if your firm is the subject of an examination. But fear not, because we’re here to help you prepare! Here are six key takeaways in improving exam readiness.


1. Update WSPs

One significant area that may be examined is the written supervisory procedures (WSPs) and any changes that have been made to them.


Firms must demonstrate that they have updated their procedures to effectively account for off-channel communications. This includes ensuring that text and mobile app messages are ingested and monitored in a manner similar to email communications. The examination may evaluate how firms are surveilling and supervising text messages and other communication channels to maintain compliance and prevent misconduct.


It will be crucial for firms to update their lexicons to enhance supervision across diverse communication modalities, including text and mobile messaging applications. Consider adapting your lexicons to accurately capture relevant information, enabling the identification of potential issues or violations in off-channel communications. Emojis, including angry faces and other indicators, may be examined to detect customer complaints or negative sentiment.


Additionally, firms are expected to adjust their lexicons and monitoring systems to promptly detect when conversations shift from approved channels to off-channel methods, such as transitioning from email to text messaging. This proactive approach facilitates the early detection of potential misconduct or violations.


2. Capture voice clips in text messaging

Another likely exam focus is the use of voice clips in text messaging. Firms must ensure that voice clips are not used to evade supervision. Monitoring technologies should encompass voice messages to maintain a comprehensive oversight framework.


FINRA may aim to determine if firms have implemented appropriate controls to prevent misuse of voice clips and other alternative communication methods.


3. Establish communications training

The examination may also evaluate how firms define and communicate their “business as such” to employees. It is important for firms to have clear guidance on the expectations and use of off-channel communications. This includes instructing employees on the appropriate channels to use for specific types of business-related communications.


Training and education are crucial in ensuring compliance with off-channel communication policies, and an examination will look for this in training curriculum. Firms need to demonstrate the rigor and effectiveness of their training programs by emphasizing the importance of adhering to proper communication channels and protocols.


4. Lead by example

The “tone from the top” is a critical aspect of the examination. This comes at a time when several SEC enforcement actions have revealed off-channel violations originating from senior management and compliance teams.


It is expected that FINRA will assess the management’s commitment to off-channel communication policies. Firms must establish a culture that prioritizes regulatory compliance and ethical conduct and fostering an environment where all employees understand and abide by the rules.


Examinations may require firms to demonstrate that controls and safeguards are in place for senior roles, especially if they have access to material nonpublic information. Special attention will be needed to monitor the off-channel communications of these individuals, particularly their text and mobile messaging activities. Firms need to ensure that enhanced supervision is enforced for those who handle sensitive information to mitigate the risk of insider trading or improper dissemination of confidential data.


5. Implement communication (and supervision) technologies

During on-site examinations, FINRA’s exam questionnaire will specifically inquire about the use of communication systems outside of the approved channels. Examinations may review the implementation and design of new technology systems to monitor off-channel communications. This can include:


  • The capabilities of these systems
  • Who can access and utilize the systems
  • How effective are these deployed systems


Any attempts by firm employees to circumvent or evade these monitoring technologies will be regarded as red flags and subject to further scrutiny.


6. Addressing red flags

In cases where red flags are identified, FINRA may evaluate the firm’s investigation procedures and disciplinary actions. It is essential that firms document and demonstrate swift and appropriate responses to potential violations, reinforcing their commitment to maintaining compliance and integrity in business communications.


What’s next?

FINRA will gather information from its examinations and provide valuable feedback to the industry regarding best practices for off-channel communications. This transparent approach seeks to enhance regulatory compliance and promote a culture of responsible communication within the industry.


FINRA’s intensified focus on off-channel communications during examinations further emphasizes the importance of effectively monitoring and supervising communications outside approved channels. Firms must ensure that their written supervisory procedures account for off-channel communications, including proper surveillance and supervision of text and mobile messages.



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Source: Smarsh


Author: Tiffany Magri Regulatory Advisor at Smarsh

As a Regulatory Advisor at Smarsh, Tiffany monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.


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