Our team traveled to the FINRA Annual Conference in Washington, DC last week and wanted to share a few key takeaways that we found especially relevant and thought-provoking.

On-Channel and Off-Channel Communications

• Supervision Protocols: Business-related communications must flow through the firm’s designated in-channel system. While casual off-channel client communications (e.g. confirming a dinner reservation) are exempt from retention, any continuation of business discussions over off-channel mediums (e.g. WhatsApp) necessitates retention and supervision. Of note, taking a screenshot of the communication and saving it to a file satisfies the retention requirement but may not satisfy the supervision requirement.
• Red Flags and Supervision: Unsupervised changes to business email signatures and business cards, as well as phrases referencing off-channel communications in on-channel discussions, are typically red flags. Supervision of these changes is crucial to ensure compliance.
• Detection Methods: Firms employ various methods, including client service follow-ups, to detect off-channel communications. Any mention of texts or WhatsApp messages prompts further investigation.

AI Integration

• Regulatory Sentiment Analysis: AI can be leveraged for sentiment analysis to gauge regulatory responses. This approach may offer valuable insights into our compliance strategies. For example, some firms will craft a policy and say “how would a react to this.”
• Explainability Challenge: While AI integration holds promise, ensuring explainability remains a significant challenge. Models’ non-deterministic nature and potential for varied responses underscore the need for caution. For example, an AI model might give two different answers to the exact same prompt.
• Supervisory Procedures: Drawing from frameworks like the NIST AI framework can inform the development of written supervisory procedures.

Other Takeaways

• CAT Collaboration: FINRA’s dual role as both service provider and regulator for the Consolidated Audit Trail (CAT) poses unique challenges, necessitating collaboration with other exchanges while also serving as a vendor to those exchanges for the CAT service.
• Ongoing Regulatory Review: While certain regulatory updates, such as those related to gifts and entertainment, may have receded, FINRA continues to look at rules for Outside Business Activities and Private Securities Transactions for potential updates.

Should you have any questions or want to discuss these points, please reach out to our team at support@knopman.com.