Regulators Intensify Scrutiny of Communications Methods in Financial Firms: Implications for Compliance Teams

Regulators Intensify Scrutiny of Communications Methods in Financial Firms: Implications for Compliance Teams


Regulators, led by the U.S. Securities and Exchange Commission (SEC), are stepping up their scrutiny of financial service firms' communication methods in a sector-wide clampdown. While text messages and emails have come under tighter surveillance, the focus is now shifting towards video calls, with concerns that regulators will soon assess these calls for potential compliance breaches.

The clampdown initially concentrated on business-related text messages sent through unauthorized platforms like WhatsApp, which went untracked and unrecorded by regulated firms, particularly during the COVID-19 lockdowns when employees were working from home.

Despite the SEC declining to comment on the matter, sources familiar with the situation suggest that concerns have arisen that recording requirements might expand to encompass video calls, Zoom calls, or similar forms of communication.

In response to this heightened regulatory focus, financial firms are mobilizing technology specialists, law firms, and risk consultants to ensure that video calls are properly monitored and retained as required. This move aims to meet record-keeping requirements and mitigate the risks associated with potential illicit sharing of non-public information during these calls, as reported by twelve sources to Reuters.

These regulatory efforts align with a broader trend of increased protections for retail investors who have been more actively participating in financial markets, fueled in part by phenomena such as meme stocks.

Brad Levy, CEO of market infrastructure and tech firm Symphony, emphasized the industry's evolving nature, stating, "I don't think we've a clue yet of how to incorporate video into a highly regulated work environment."

Currently, video calls are generally considered proxies for face-to-face meetings, with minimal formal record-keeping obligations. However, experts like Matthew Nunan, a partner at law firm Gibson, Dunn & Crutcher, anticipate that regulators will likely begin assessing potential compliance failures over video calls.

Sarah Pritchard, executive director for markets at the UK's Financial Conduct Authority, emphasized the need to focus on market abuse and the mechanisms used to facilitate such activities during her recent speech at the authority's annual meeting.

It's essential for companies to be vigilant about possible breaches over video calls. Staff sharing sensitive information are more likely to arrange in-person meetings without using workplace devices. However, historical investigations have revealed evidence of wrongdoing over work-related email and chatrooms. As a result, managers are under pressure to assess potential breaches over video calls, which have become routine for thousands of finance workers.

Claire Garrett, head of the financial institutions practice at Marsh, underscored the significant shift in how the industry operates and urged firms to stay current with the new risks it brings.

While it's reported that at least two major global banks are now recording Zoom calls, it's unclear whether this was initiated due to regulatory requests. HSBC, for instance, is blocking some staff from sending texts via their work phones, as reported by Bloomberg. However, it remains uncertain whether HSBC is also recording and archiving video calls between staff and clients.

Microsoft has highlighted recording options for capturing calls required by relevant industry regulation, and Zoom did not respond to Reuters' request for comment on the matter.

The U.S. Financial Industry Regulatory Authority (FINRA), which oversees over 624,000 U.S. broker-dealers, obliges certain firms to comply with the 'FINRA Taping Rule 3170.' This rule, designed to prevent improper practices in the sale or marketing of financial products, currently requires the tape-recording of all telephone conversations between registered persons and customers for at least three years, with quarterly activity reports filed to the regulator. However, it remains unclear whether this rule extends to video calls.

As regulators increase their scrutiny of video communication, compliance teams in financial firms face the challenge of ensuring that video calls meet regulatory requirements, are properly monitored, and adhere to the same standards as other communication methods. The evolving landscape of financial technology and communication methods is placing a new burden on firms to remain compliant and secure while conducting their business operations.