LEXICON SURVEILLANCE IS NOT DEAD

An explosion in data volumes, proliferation of platforms and evolving regulatory requirements has made effective monitoring of employee communications much more difficult. The remote and hybrid working environments financial firms have adopted due to the coronavirus (COVID-19) pandemic have driven increased use of emails and chats, and accelerated use of collaboration and web conferencing channels such as Slack, Microsoft Teams, WhatsApp, Twitter and Zoom.

Amid this rapid change, there is a debate among compliance teams over the efficacy of traditional lexicon surveillance – using simple keywords and phrases to monitor electronic communications – versus artificial intelligence (AI) technologies. In fact, firms that use both methods – as appropriate, and complementing a robust surveillance operating model – are best positioned to manage regulatory and internal risk.

The case for lexicon surveillance

Financial firms are required to perform surveillance on their employees’ electronic communications to meet both regulatory obligations and internal compliance mandates.

Broker-dealers and other market intermediaries in the US are governed by the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), Commodity Futures Trading Commission (CFTC), and National Futures Association (NFA). Europe and Asia-Pacific have similar requirements from the UK Financial Conduct Authority (FCA), UK Prudential Regulation Authority (PRA), EU National Competent Authorities (NCAs), Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC), Monetary Authority of Singapore (MAS), and many other regulators.

And those regulators have gotten much more aggressive in assessing large fines to financial market participants, for relatively simple and clear violations of surveillance policies. Though no surveillance system is perfect – and a truly malicious actor can find ways to circumvent a policy – well-defined lexicon-based surveillance systems remain a critical component to flagging potentially damaging communications for further investigation. As various transcripts of legal record filings illustrate, some firms could have avoided financial and reputational damage by optimising their lexicons.

Oct-Dec 2021 Issue

Bloomberg L.P.