2023 FINRA Risk Management Priorities: The Year of Digital Communications

The updated recordkeeping requirements under SEC 17a-4 have led to changes in the way firms are thinking about records management. The update focuses on a principle-based approach and attempts to harmonize regulation with current technology. Cherry highlighted that the update had generated questions from her clients regarding revisions to Letters of Undertaking, as well as third-party downloader requirements and the due diligence that firms must undergo when using cloud-service providers. She also highlighted that one of the biggest concerns from an operational standpoint is the process of reviewing the records and recreating them during a supervisory obligation or audit. Firms should ensure that their vendors understand the books-and-records, and don’t impede the firm’s ability to meet their regulatory obligations.

All panelists agreed that a shift towards an audit trail would not be a simple process, as it requires a log of everything that takes place for each individual record for each day of the year — and for each time a different communication type is used. The operational aspects of this process are difficult, and firms may not be willing to take on the risk. This is especially true when it comes to the trade-settlement process and other areas where vendors are involved.

Webinar attendees also raised questions regarding regulatory guidance on using video communications and recordings, natural-language processing, and models in the financial industry.

Magri noted that there is additional guidance from FINRA on the use of video technologies and how they should be integrated into communications with the public. Video content is being considered as business record by more firms and Magri encourages all firms to evaluate their policies and procedures in this area.

Attendees were also curious about the use of machine learning in conduct surveillance and electronic communications review. Magri noted she is seeing a lot of interest in natural-language processing and its potential to reduce the number of false positives in reviews and identify red flags that a lexicon-based review system may miss.

Cruz also noted that regulatory guidance on the use of artificial intelligence and natural language processing is expected, and that FINRA has indicated that it will be vocal on the topic. Cruz also expects the use of these technologies to increase in the industry, as it provides a way to address the variety of information which can escape a lexicon or human reviewer's ability to understand.