In recent developments, U.S. regulators have imposed significant fines on financial services firms for non-compliance with communication recordkeeping obligations. The U.S. National Futures Association (NFA) has been particularly active, issuing fines in instances of inadequate communication capture and retention.
Theta Lake recently detailed how US regulators issue more fines for recordkeeping and supervision failures across 2023.
A U.S. introducing broker and swap dealer was fined $140,000 in October for failing to capture essential oral pre-trade communications as required by Commodity Futures Trading Commission and NFA regulations. Despite the firm’s policy to conduct trade-related discussions via chat or electronic messaging, the NFA found this expectation unrealistic. The firm’s procedure was deemed deficient, as it failed to ensure all necessary communications were captured and archived.
The same firm faced criticism for inadequate oversight in capturing and retaining chat messages. Without proper reconciliation controls, the firm was unable to detect when messages were not appropriately archived. The NFA opined that these omissions should have been discovered much earlier, indicating a severe oversight in the firm’s compliance processes.
Meanwhile, a UK introducing broker incurred a $140,000 fine in November for not maintaining all oral communication records. This was primarily due to brokers using unrecorded personal cell phones, hindering the firm’s ability to provide details necessary for trade reconstruction. The NFA’s investigation revealed that a significant portion of trading activities occurred over these unrecorded devices.
Another case involved the Financial Industry Regulatory Authority (FINRA) fining a firm $600,000 for failing to establish a robust supervisory system for email review. The firm neglected to review approximately 3.5 million emails from 691 employee accounts, highlighting a breakdown in establishing and maintaining effective review processes.
The ongoing regulatory focus on communication compliance has prompted financial services firms to reassess their strategies. According to Theta Lake’s annual survey, most firms are reevaluating their approach, with only a small percentage expressing confidence in their existing methods. This reassessment includes enhancing technical and administrative controls for continuous monitoring and validation of compliance practices.
In the current regulatory climate, failure to adequately monitor and supervise communications can lead to severe penalties. Future sanctions may even extend to individual accountability at the senior level, emphasizing the need for rigorous compliance measures.
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