Managing Books and Records Through Technology

The implementation of technology has become an integral component in the administration of a compliance program. Gone are the days of maintaining hardcopies in filing cabinets and conducting manual reviews of compliance tests. Similar to the adoption of technology in the management of client relationships, client portfolios, and trades, compliance and technology has become akin and a necessity in the modern era of administering an effective compliance program.

Over the years, we have witnessed a myriad of compliance technology solutions to hit the market. With the countless offerings from various vendors, compliance officers may find it overwhelming in identifying the solution that is right for their firm. There is no one magic pill solution in designing an effective compliance program and same goes for compliance technology solutions. It is imperative for the compliance officers to identify the components of the compliance program that they want to manage through the use of technology.

In this month’s Risk Management Update (“RMU”), we uncover how technology has become an integral part of effectively managing a compliance program and how different solutions can assist in recordkeeping and monitoring.

 

Books and Records and Electronic Filing

Pursuant to Rule 204-2 of the Investment Advisers Act of 1940 (“Books and Records Rule”), registered investment advisers are required to maintain and preserve certain books and records. Books and records must be in an easily accessible place for not less than five years. Advisers must be able to produce documents in a timely manner in response to requests from regulators. In order to ensure compliance with the Books and Records Rule, from time-to-time, advisers are required to perform periodic testing of its books and records. Advisers are expected to implement safeguards to ensure that books and records are preserved from loss, destruction, alteration, and unintended breaches. In the modern era and as we move towards a more remote work environment, advisers should consider implementing compliance technology solutions to centralize the firm’s books and records and to ensure secure remote access for all authorized members of the firm.

Furthermore, the Securities and Exchange Commission (“SEC”) recently adopted rules to require certain documents filed by advisers and institutional managers to be filed or submitted electronically with the Commission.[1] The adoption of the amendments are intended to promote efficiency, transparency, and modernize how information is filed and disclosed to the public. The SEC illustrated their support for expanding electronic filing capabilities to transition from the outdated and unnecessarily burdensome paper submission process. The SEC Chair Gary Gensler expressed how “In a digital age, it is important for filers to have easy, online methods to submit information to the Commission.”

Advisers can adopt and implement compliance technology solutions to assist with required electronic filings. Various technology solutions can assist in the electronic filing process as they integrate with existing internal data management or recordkeeping systems. Technology can also validate information and eliminate potential logistical and operational errors. Lastly, the use of technology will improve efficiency and will free up compliance officers to focus on other areas of the compliance program.

 

Electronic Communications Archiving and Monitoring

Besides maintaining and preserving books and records, pursuant to Rule 204-2(a)(7) advisers are required to retain original forms of all received written communications and copies of all written communications sent by members of the adviser. In the digital age, we have identified written communications to include but not limited to electronic communications such as emails, instant messages, text messages, and other forms of SMS (short message service) communications. In addition to the retention of electronic communications, advisers must conduct reviews in order to identify potential violations of securities laws and firm’s policies and procedures.

Over the years, we have identified countless technology solutions designed to archive and assist with the review process. Technology has simplified the review and surveillance process for compliance officers, as most solutions offer random sampling options, keyword policies and searches, automated flagging processes, and system generated reports. Gone are the days of manually trudging through the mud of firm issued forms of communications to conduct and document reviews. The use of implementing technology will expedite the review process and simplify documentation.

In addition to making sure that all forms of firm issued communications are being retained and reviewed, advisers must also stay up to date on the everchanging landscape of technology and communication. As technology continues to evolve, we witness new forms of communication outside of the traditional channels such as WhatsApp, WeChat, and Telegram messages. Advisers must make sure that employees are not communicating securities related business matters on unofficial channels where the records are not being archived.

Even the largest financial institutions are not immune, as last December we witnessed charges brought against J.P. Morgan Securities LLC (“JPMS”) for widespread and longstanding failures to maintain and preserve employee communications on personal devices through messaging applications such as WhatsApp and personal emails.[2] JPMS acknowledged that its recordkeeping failures hampered the SEC’s ability to investigate potential violations of federal securities laws. The SEC also acknowledged that JPMS had record-keeping policies and procedures in place; however, they failed to adopt and implement the written policies addressing such communications.

Simply having policies and procedures and prohibiting the use of personal devices and text messaging applications are not enough. Advisers must implement solutions to ensure compliance with recordkeeping requirements and federal securities laws. As we have witnessed the evolution of communication, technology vendors have been working hard to develop solutions to keep up with rigors of regulatory recordkeeping requirements. Even the most advanced encrypted messaging applications are no match for solutions as they have developed the ability to archive messages, multimedia files, and even deleted messages. Additionally, they have streamlined the process by developing the ability to upload archived content into firms’ existing electronic communications archives. Alternative communication archiving solutions can eliminate the headache of employees utilizing unconventional forms of communication and prevent potential enforcement actions.

 

Social Media Archiving and Monitoring

Furthermore, we have transitioned into a community intertwined by social media platforms. Advisers are no exception, as firms have embraced social media and its ability to accelerate and expand its marketing footprint. As we discovered with the new Marketing Rule, the SEC has finally entered the social media discussion and provided guidance on social media use by advisers and its employees. The SEC has expressed that an adviser is generally not responsible for third-party social media likes, shares, and endorsements if the adviser is not selectively deleting, altering, or prioritizing third-party postings, and not involved in their preparation.[3]

In addition, in the release of the new Marketing Rule, the SEC recommends that advisers consider adopting and implementing policies and procedures prohibiting the use of personal social media by employees to market advisory business. The SEC also provides general guidance on how compliance officers can achieve supervision and compliance.  Importantly, both can be performed and documented through the use of technology solutions.

Similar to other forms of electronic communications, advisers are also required to archive and monitor social media posts, websites, and blogs, and  retain copies of such  for no less than five years.  To help advisers avoid potential recordkeeping violations, technology vendors have developed solutions to establish direct source capturing with the most popular social media content from LinkedIn posts to even TikTok videos. Technology solutions expedite and streamline review by ensuring that any account changes are brought to the forefront of the review. In addition to the archiving of content and posts, technology vendors also have the ability to retain social media messages. Lastly, rather than adopting policies and procedures that prohibit the use of certain social media sites for marketing advisory business, compliance officers can embrace a proactive approach and capture all social media postings used by the firm and employees through the use of technology solutions.

 

Conclusion

In the everchanging digital landscape, technology has become synonymous with the administration of a compliance program. Compliance technology solutions can lead to efficiencies, simplify difficult tasks, and eliminate headaches. However, technology can only aid so far, as it requires the individuals involved to embrace and adopt solutions.

Core Compliance is familiar with the various types of technology solutions discussed in this RMU and can provide recommendations and assistance with implementation and ongoing administration of your compliance program. In addition, we’ve recently published a list of vendors that provide various services, including some that provide technology solutions.[4]

Call or email us at 619-278-0020 or info@corecls.com, or visit us at www.corecls.com for more information.

Author:  Jihoon Kim, Senior Compliance Consultant, Compliance Technology Specialist; Editor: Tina Mitchell, Managing Director, Consultation Services, Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.

This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer and/or tax professional.

 

[1] SEC Adopts Rules to Require Electronic Filing for Investment Advisers and Institutional Investment Managers  https://www.sec.gov/news/press-release/2022-113

[2] JPMorgan Admits to Widespread Recordkeeping Failures and Agrees to Pay $125 Million Penalty to Resolve SEC Charges https://www.sec.gov/news/press-release/2021-262

[3] Final Rule: Investment Adviser Marketing https://www.sec.gov/rules/final/2020/ia-5653.pdf

[4] See https://www.corecls.com/risk-management-updates-rmu/compliance-evolution-outsourcing-solutions-for-2022/

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