Regulators are Clear: Communications Compliance a Must
Regulators are clear: communications compliance is a must, but thankfully, the technology is here to make recordkeeping and communications surveillance easier regardless of the institutional size and business scale.
In August, the principal U.S. financial regulators, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), issued a total of $555 million in monetary fines and penalties against nine financial groups (ranging in size from $6 million up to $200 million across both regulators), while simultaneously filing and settling various charges against the firms.
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The regulators levied fines for failures in maintaining and preserving records required to be kept under CFTC and SEC recordkeeping regulations. These failures meant, in turn, that the firms would be unable to produce these records if needed (for example, to assist in an investigation) – itself an offense.
Including these most recent fines, the U.S. regulators’ fines against 23 global and domestic financial groups for these failings total USD 2.6335 billion since December 2021.
Initially, the financial groups being sanctioned were large, top-tier groups with global operations; however, more recently, the regulators have been targeting smaller domestic firms and non-tier-one foreign firms. The fact that the regulators are imposing small (e.g., $6m) fines indicates that this is a live issue for all regulatory examinations and that smaller firms should also expect regulatory scrutiny.
With the recent explosion in the number of potential communications channels showing little sign of abating, the regulators are making a clear statement not only to the firms themselves but also to the individuals at all firms: it might be up with the latest trend to use a specific messaging app when communicating with colleagues or a client, but unless your employer approves that channel, and it is being recorded, don’t use it, or there will be real-world, career-limiting consequences, no matter if you’re a new joiner or a senior managing director.
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On that point, the regulators have repeatedly noted in their statements that in several of these cases, there was evidence of intentional wrongdoing at senior levels and some senior individuals’ attempts to obfuscate both their internal compliance functions and the regulators.
The CFTC and SEC have made it clear that recordkeeping is a significant area of concern for them; not only is it a matter of strict liability for a firm to fail to record business communications, but as pointed out by the regulators in their statements, the lack of mandated records makes the regulators’ job of combating financial crime, more complex. So, to bring together their actions in fining firms and comments about tone-from-the-top and C-suite accountability, it is fair to assume that the regulators may start to shift their focus to look more closely at wrongdoing by individuals as they continue their examinations around recordkeeping and begin imposing sanctions on them.
Disturbingly, according to our recent survey of financial institutions, at least 60% of firms still need to adequately monitor newer communication channels, including Microsoft Teams, Bloomberg Chat, Zoom, and WhatsApp. The gap is massive, and the result is the fines we’re seeing for these lapses. Regulators are clear: communications compliance is a must, but thankfully, the technology is here to make recordkeeping and communications surveillance easier regardless of the institutional size and business scale.
Effective compliance will require not only capturing and archiving of all business communications, across multiple channel types, but also surveillance of those communications to detect wrongdoing, as well as the ability to match up suspicious communications with activity in the markets – and then reconstruct what went on, all in the one place.
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