Bloomberg Law: INSIGHT - Charting a Path to Remote Work Compliance Under FINRA Rules

As financial services firms are adjusting strategic and tactical plans to cope with the Covid-19 crisis, several regulators have offered guidance through formal published notices as well as web sites and webinars.

The latest, from the Financial Industry Regulatory Authority (FINRA), is a notice that gives compliance officers a look at what firms are doing to transition to remote work and supervision.

In March, FINRA created a set of FAQs on COVID-related topics ranging from advertising to supervision that are being continuously updated. On May 28, it released Regulatory Notice 20-16 covering the transition to remove work and remote supervision as a result of the pandemic.

Notice 20-16 is unique in that it does not provide FINRA guidance per se, but rather collects “common themes [it] observed through discussions with small, mid-size and large firms about the steps they reported taking to transition their associated persons and supervisory procedures to a remote work environment.”

Based on takeaways from the notice and FAQs, firms should focus on three broad areas: clear communications with customers, employees, and regulators; extending safeguards and training on the protection of sensitive data; and enabling surveillance and compliance standards for new communication tools like collaboration and video platforms.

For compliance officers on the outside looking in, Notice 20-16, read in conjunction with the FAQs, offer broader insights into FINRA’s approach to remote working and supervision risks, which will be increasingly important given that WFH arrangements are likely here to stay.

Clear Communication

Throughout the notice, FINRA finds that communication is key during these transitional times. From alerts about branch closures and alternate contact information to deployment of new collaboration tools and initiating routine “all hands” calls, FINRA found that firms were focused on providing open and active streams of information about changing situations as employees migrated to work from home arrangements and clients sought information about services and support.

Firms also focused communication efforts on privacy and cybersecurity. Employees shifting from firm locations with highly-controlled physical and technical safeguards to remote offices using personal computers and networks needed additional guidance about how to setup these environments securely.

Furthermore, FINRA observed that firms were proactive in providing notifications to employees about how to maintain the confidentiality of customer information and material nonpublic information (MNPI) as well as considerations for sharing office spaces—issues addressed directly in its FAQs. In addition to notifications, firms assigned additional cybersecurity trainings highlighting the increased potential for fraud in remote work settings.

Increased Supervision

With respect to supervision, FINRA found that firms were generally prepared to adapt to remote work; however, several firms implemented additional safeguards in light of the pandemic. Consistent with the notification theme, firms provided additional coaching to teams and emphasized that employees should “over escalate” issues to ensure they are identified and managed appropriately.

Firms are increasing the frequency of routine supervisory meetings and leveraging “always on” open chat rooms and teleconference lines to provide outlets for staff to discuss concerns. These comprehensive measures should come as no surprise as FINRA clearly expressed in the FAQs that firms must implement supervision systems that are “reasonably designed to supervise the activities of each associated person while working from an alternative or remote location during the pandemic.”

Firms are taking multiple manual steps to increase supervision of remote traders including executing attestations, submitting memoranda to firm leadership outlining approaches to remote trading oversight, and requiring senior management approval of testing protocols and results. Firms also turned to technology for support—using collaboration applications and conference calls for daily check ins, and adjusting thresholds for transaction reporting systems.

With respect to supervision of communications with customers, firms “acknowledged the additional risks of remote work environments and took extra measures to reinforce that associated persons must use only firm-provided and approved communications systems and tools.”

Across the board firms increased the frequency of communications review, augmented key word lists to align to the unique risks of remote work, and began to implement voice recording for staff previously not recorded in an effort to gain transparency into business conversations.

Voice Recordings and Collaboration

The enablement of voice recording, a particularly contentious subject for broker-dealers, is perhaps an acknowledgment that the regulatory, privacy, and information security risks relating to remote work outweigh a prior stance that, absent a regulatory mandate, firms would not record.

Recording telephone conversations as well as collaboration communications may become the norm as firms determine that the benefits of detecting risks in those conversations coupled with their importance from an investor protection standpoint make it an essential business practice.

Support for increased recording is reinforced by the FAQs, where FINRA takes a more aggressive, and proactive, approach to recordkeeping and supervision requirements for collaboration tools stating that “if a registered representative during the video or audio conference uses the chat or instant messaging feature of the platform or presents slides or other written (including electronic) communications, the member must keep records of these written communications in accordance with Securities Exchange Act Rule 17a-4” as well as FINRA’s supervision and communications with the public rules.

Taken as a whole, Notice 20-16 and the FAQs emphasize that open and transparent communications—about branch closings, cybersecurity, transaction reporting, and supervision—are critical during the pandemic. FINRA’s observations indicate that firms are already planning for a longer-term transition to remote work by taking advantage of new ways of conducting business and building compliance into those processes.

Since it is likely that remote work will become a predominant practice after the pandemic subsides, FINRA’s observations and guidance help to pave the path to a new compliance paradigm.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Marc Gilman is general counsel and vice president of compliance at Theta Lake. He is also an adjunct professor at Fordham University School of Law. Follow him on Twitter: @marcwiki.

This article first appeared on Bloomberg Law,
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Marc Gilman

Marc Gilman is the General Counsel and VP of Compliance at Theta Lake as well as an adjunct professor at Fordham University School of Law

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Bloomberg Law: INSIGHT – Charting a Path to Remote Work Compliance Under FINRA Rules

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