Managing Tech in the Broker-Dealer Industry

Customer service is key in driving the growth of business. In the highly-regulated broker-dealer industry, a focus on better customer service is often the distinction between competing firms.

The ongoing Fintech revolution in the financial services industry has opened up innovative options for representatives to be more accessible to their customer base. The use of evolving technology in communication channels; e.g., text messaging and various mobile app messaging, and social media such as Facebook, LinkedIn, and personal blogging, is part of the daily routines of millions of participants in the global economy. As a result, many companies have increased their usage of these tools to reach current customers and potential new customers.

It is important to note that while these tools may be new, the rules still apply. Acting in its capacity as regulator of 3,800 broker-dealers, ensuring investor protection, Financial Industry Regulatory Authority (“FINRA”) has established certain applicable rules. FINRA Rule 3110(a)(1) requires “a firm’s supervisory system to provide for the establishment and maintenance of written supervisory procedures.” Broker-dealer policies and procedures need proactive updating to reflect constantly-evolving technology in communications with customers.

Firms have a duty to ensure supervisory requirements are met when embracing new technology in communication channels or social media. FINRA Rule 3110(a)(2) requires a firm to designate an appropriately-registered principal “with authority to carry out the supervisory responsibilities for each type of business in which the firm engages for which registration as a broker-dealer is required”. Factors to consider under FINRA Rule 3110(a)(4) include whether the on-site principal is “qualified by virtue of experience and training to supervise the activities and associated persons in each location” and “has the capacity and time to supervise the activities and associated persons in each location”.  Given the rapid pace of technology growth, a firm’s designated principal should be acutely aware of any developments impacting daily operations.

Additionally, FINRA Rule 3110(b)(4) requires a firm to establish supervisory procedures “to review incoming and outgoing written (including electronic) correspondence and internal communications relating to its investment banking or securities business.”

The necessity for these requirements is evident through review of FINRA’s latest release in April 2017 of recent disciplinary actions involving misconduct. One scenario discussed related to the use of non-firm communication methods to communicate with a customer, “making exaggerated and promissory claims about securities.” Technology may change, but the mission of protecting the investor stays the same.

Supervisory controls will be a focal point of the upcoming 2017 annual regulatory FINRA examinations and will focus on firms’ testing of controls around compliance in day-to-day operations, including the assessment of “record-retention omissions.” Details can be reviewed here.

Firms should proactively consider the impact that these communication tools may have on policies and procedures. Examples of actions to take include the following:

  • Review and revise Written Supervisory Procedures (WSP) to ensure that the WSP’s contain specific policies for the usage of these communication tools, and procedures for the review of these communications.
  • Ensure the recordkeeping of retail and institutional communications is maintained for the retention period required by SEA Rule 17a-4(b).
  • Ensure the recordkeeping of correspondence is maintained in accordance with the requirements of FINRA Rule 3110.09 and Rule 4511. Correspondence is defined as “any written (including electronic communication” that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.”
  • Ensure that the firm is able to produce these records, when required.
  • Consider the need for training of firm personnel on these communication tools, even if this training is a reminder of what may have already been communicated.
  • Consider whether the firm would like to have its representatives certify that they understand and are complying with the established policies for these communication tools.
  • Consider whether the use of these tools has an impact on the firm’s information technology security risks, and how the firm would respond in the event of a breach through any of these communication tools.

The goal continues to be the protection of the customer, ensuring that the broker-dealer industry operates transparently and ethically.

We would be pleased to provide further information related to this subject. For more information, contact Frank L. Varanavage, Manager, Audit & Accounting at

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