The new disclosure rules released by the SEC in June create additional requirements for broker dealers and investment advisers to record and retain trading related communications with clients. Financial services firms must be able to easily demonstrate to the US Regulator that they made the proper disclosures to customers regarding advice on trading strategies and recommendations.
To quote the SEC Chairman Jay Clayton, he stated his intention is that "regardless of whether the retail customer chooses a broker-dealer or an investment adviser, the retail customer will receive recommendations (from a broker-dealer) or advice (from an investment adviser) that are in the best interest of the retail customer, and that do not place the financial professional's interests ahead of the interests of the retail customer."
There’s a need to protect firms from the reputational risk this may cause and the regulatory sanction by alerting when best practice isn’t being observed.
What is Reg BI (Best Interest)?
Reg BI is a new set of rules that require US broker-dealers and investment advisers to disclose the nature of their relationship with customers as well as any conflicts of interest. These disclosures may occur at the beginning of a relationship or could occur on a transaction by transaction basis depending on the type of firm, the type of transaction and the relationship with the client. Integrated financial institutions can have a multi-faceted relationship with clients.
You can read more about the details of Reg BI here.
What to achieve compliance with a complete view of your trading lifecycle? Download this datasheet on Trade Reconstruction.
The Challenges of Oral Disclosure: How do you track client interaction?
The brokerage industry in the USA is known historically for high touch and personal relationships with their clients. However, this way of working creates its own set of problems. Un-tracked phone conversations make up the majority of client interactions. In the SEC document, it states that “most recommendations occur over the phone and through various digital means”. Under the new regulation, firms will be expected to record and track any instances of disclosure, be them oral or via email and chat.
A Summary of the New Challenges
- How to track written disclosures sent to clients? Whether they are in email or email attachments.
- How to track the oral disclosures that were made to clients during voice communications?
- How to spot the gaps where an oral disclosure has taken place but hasn’t been recorded?
- How to confirm that what was conveyed in an oral disclosure has been confirmed in writing to the clients?
Whether the disclosure is in the form of a written or oral communication, Fonetic’s Automatic Trade Reconstruction can automate the Regulation Best Interest (Reg BI) requirements for tracking disclosures to customers.
What is Automatic Trade Reconstruction?
Fonetic’s Proactive Trade Reconstruction software automatically links trades with related communications. This functionality was developed to meet the stringent requirements of the Dodd Frank Title VII regulation but linking trades with the related communications has many useful applications.
The automated process uses machine learning and natural language processing to identify key elements in the communications and then matches them to the structured data within the trade records. The accuracy of this approach is significantly higher than other methods that merely use metadata to identify the date, time and counterparty of the communication. By analyzing the content of the communication this process can detect which communications are related to a trade and if they contain information about the disclosure of the relationship to the client.
Fonetic not only analyzes text-based communications. For more than a decade Fonetic has provided voice surveillance to large multinational companies and financial institutions. The calls are analyzed to remove noise, enhance the signal and improve the accuracy of the transcription. Over 35 different languages are supported.
Upon request from a regulator or auditor the trade-related communications can be identified, reviewed and supplemented, if necessary. Once all the communications have been confirmed they can be packaged up in a common format to be sent over to the requester.
How does Trade Reconstruction meet the SEC’s requirements?
- Connection to over 30 data sources
- Advanced call and content classification
- Rapid review of the trading lifecycle
Fonetic Automatic Trade Reconstruction can ingest most sources of communications. Whether it is fixed line voice, mobile voice, email, instant message or chat, all the communications can be delivered into a single repository for analysis. Any communication that contains disclosure related language can be easily identified and reviewed before sending over to the regulator or internal auditor.
For a presentation and demo of this solution please contact us.
If you’d like to know more about how Trade Reconstruction can give you end to end intelligence of your trading lifecycle, saving your time and money in external consultants, download our datasheet here.
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