Supervisory review is critical in financial advisory communications

In our increasingly connected world, reviewing and supervising electronic communications between financial advisors or registered representatives and their clients has become more important than ever. With increased regulatory scrutiny and the frequency of new communication apps popping up, banks and financial firms must step up their game in overseeing these interactions to protect their clients, stay compliant, and maintain their hard-earned reputation. Let's dive into four critical areas where supervisory review makes all the difference: off-channel communications, insider information violations, gifts and entertainment policy violations, and customer complaint discovery.

The perils of off-channel communication

One of the biggest headaches for compliance teams today is the growing challenge of off-channel or "change of venue" communications. Think about those business conversations that can happen through personal text messages, social media chats, or popular messaging apps—all outside firm-approved communication channels.

Recent enforcement actions by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) highlight the critical importance of addressing off-channel communications in financial firms.

• Since December 2021, the SEC has brought charges against more than 100 firms and ordered over $2 billion in penalties related to off-channel communications.
• The CFTC has imposed over $1 billion in penalties against 18 financial institutions for similar violations.
• In a single day (August 8, 2023), the SEC announced settlements totaling $289 million with 11 firms, while the CFTC announced $260 million in penalties against four institutions.

To stay out of trouble, firms should consider:

1. Setting clear boundaries with policies that ban unauthorized channels for business talk.
2. Keeping employees in the loop with regular training about using approved channels only.
3. Embracing technology that can spot potential off-channel communication attempts.
4. Having corrective actions processes to handle violations.

Taking these steps helps firms avoid hefty penalties and keep their supervision processes running smoothly.

Detecting insider information violations

When it comes to catching potential insider trading issues, introducing electronic communications review mechanisms is crucial. Whether intentional or not, non-public information could be shared with employees that could give an unfair trading advantage, violate regulatory requirements, and create potential legal issues.

To stay on top of this, firms should consider the following:

• Use smart monitoring systems that can flag suspicious communications.
• Teach reviewers what subtle signs of insider information sharing look like.
• Keep their monitoring approach fresh based on new trends and regulatory guidance.

Catching these issues early can save firms from major legal troubles and reputation damage.

Enforcing gifts and entertainment policies

Gifts and entertainment (G&E) policies in the financial services industry are designed to prevent conflicts of interest, maintain ethical standards, and ensure that financial professionals act in the best interests of their clients. These policies typically limit the value of gifts that can be given or received, require documentation of such exchanges, and distinguish between acceptable business entertainment and inappropriate gifting.

Key elements of G&E supervision include:

• Reviewing for conversations about gifts, entertainment, or client hospitality.
• Matching communications with reported G&E expenses.
• Making sure G&E discussions follow the firm's approval process.
• Utilize automation including Natural Language Processing (NLP) and sentiment analysis to review for exceeding monetary thresholds, improper influence, and potential violations of fiduciary duties.

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Good G&E supervision helps maintain professional standards and prevents potential conflicts of interest.

Uncovering customer complaints

Catching customer complaints early and addressing them promptly is essential for maintaining client relationships, meeting regulatory requirements, and following each firm’s proper complaint escalation and handling procedures. When electronic communications are reviewed carefully, client issues and concerns are often discovered that might not have been formally reported through the correct supervisory and compliance channels.

Here are some suggestions to effectively spot customer complaints in communications:

• Give reviewers solid training on recognizing the signs of unhappy customers and potential complaints (use real-life examples with redacted personal information).
• Have clear steps in place for escalating any issues that arise.
• Employ automation to detect and flag words and phrases commonly used in complaints to escalate for further review.
• Use what we learn from reviewing communications to make client service and complaint handling even better.

When firms actively address customer concerns found in communications, they show clients they care while demonstrating their commitment to following the rules.

The path forward: embracing technology and best practices

As electronic communications keep growing in both volume and complexity, firms need to get smart about using advanced technology to scan for potential violations and escalate them. Below are seven steps that can enhance your compliance programs if implemented:

1. Use AI-powered monitoring tools that can process massive amounts of data and spot potential risks more effectively than human review alone.
2. Implement tools that can be trained on existing or archived data to detect potential violations in ongoing advisor/client communications.
3. Keep word, phrase, lexicon lists, and monitoring criteria up-to-date to match changing communication trends.
4. Build or enhance a corporate culture where everyone understands why using approved communication channels and following firm policies matters.
5. Run regular training sessions for both employees and supervisors to keep everyone current on compliance requirements and best practices.
6. Set up straightforward procedures for handling potential violations found during reviews.
7. Keep detailed records of oversight and supervisory processes and findings to show regulators the firm's compliance efforts.

The size of the fines and the scale of the reputational damage via media headlines can be mitigated when firms build and maintain strong, technology-enhanced supervision systems that can adapt to the constantly changing communication trends.

Conclusion

Supervising electronic communications is a must for financial firms’ compliance programs. Off-channel communications, insider information sharing, G&E policy compliance, and customer complaint detection are key areas to employ automated tooling assistance over advisor/client communication reviews. These use-cases provide building blocks to tackle even more potential internal policy violations and external regulatory concerns, e.g., guarantees and assurances, political involvements, etc.

Regulators have strongly stated the importance of monitoring and archiving electronic communication, especially those occurring via off-channel or unapproved apps. Firms need to stay proactive, diligent, and alert in their supervision approach. By using technology wisely, reviewing and amending internal policies, and continuing to maintain compliance-focused cultures, financial firms can handle the challenges of electronic communications.

Maintaining the reputation of financial firms and the integrity of our industry is essential for the ongoing success of our capital markets. As our clients and advisors increasingly adopt new digital communication methods, it’s more important than ever to ensure robust supervision.

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Published February 19, 2025

The opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. This content is for informational purposes only and should not be interpreted to be or relied upon as legal or compliance advice. Saifr, and its related Fidelity entities, are not responsible for determining the requirements of any laws or rules applicable to customers for actions taken or not taken in reliance on Saifr's products and services or the information provided. Fidelity does not assume any duty to update any of the information.

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