Alert January 01, 2008

FINRA Issues Final Guidance Regarding the Review and Supervision of Electronic Communications

FINRA issued principle‑based guidance (the “Guidance”) for its member firms to consider when developing supervisory systems and procedures for electronic communications.  The Guidance is in substantially the form set forth in the joint proposal made by the NASD and NYSE Member Regulation in June 2007 prior to their consolidation into FINRA.  The Regulatory Notice announcing the publication of the Guidance indicates that the Guidance neither creates new supervisory requirements nor requires the review of every communication; rather, it sets forth principles that FINRA believes firms should consider in structuring the supervisory policies and procedures that each firm should have in place to monitor all electronics communications technology used by the firm and its associated persons in order to achieve compliance with applicable federal securities laws and self regulatory organization rules.  The Regulatory Notice also points out that firms have a separate, but equally important, obligation to ensure that their use of electronic communication media enables them to make and keep records as required by applicable SEC, NASD and NYSE rules.

The Guidance itself addresses the following six topics in some detail:

  • Written policies and procedures – the need for, and considerations in developing, maintaining and disseminating, clear policies and procedures governing the general use and supervision of electronic communications.
  • Types of electronic communications requiring review – (a) policies and procedures regarding the forms of electronic communications employees may use when conducting business with the public, and related monitoring efforts and (b) the extent to which review of internal communications is necessary to properly supervise a firm’s business, e.g., to detect when a member’s information barriers are not effective.
  • Identification of the person(s) responsible for the review of electronic communications.
  • Methods of review for correspondence – the use of lexicon-based reviews and random reviews.
  • Frequency of review of correspondence.
  • Documentation of review of correspondence.
The Guidance concludes by noting that it is not all‑inclusive and does not represent all areas of inquiry that a member firm should consider when establishing and maintaining a supervisory system for electronic communications, particularly with respect to any existing and future electronic communications technology that the Guidance does not address.  The Guidance further cautions that it does not establish a safe harbor with respect to potential supervisory or compliance deficiencies.