Digital Signature Fraud: The New Compliance Whack-A-Mole

Once again, FINRA has fined and temporarily suspended another LPL broker over digital signature fraud. This latest measure against LPL not only adds to the reputational damage to the firm, but also to the reputation of each broker who conducts business under the LPL brand. The publicity and persistence of these digital signature fraud instances and FINRA’s actions to control them may indicate a new area of focus with regard to client communications, overtaking the spate of texting and WhatsApp errors for which FINRA penalized advisors and firms in the past two years.

And now, the industry’s other major regulator could follow a similar playbook. The SEC recently charged 16 advisors with failing to maintain electronic communications standards required of recordkeepers.

The writing on the wall is clear for broker-dealers, RIAs, and the financial professionals associated with them: Surveillance of client communications in general, and digital signature fraud in particular, has become the latest game of whack-a-mole for regulators. When the hammer comes down, firms will pay the price for not following the rules.

How Did We Get Here?

It’s fair to ask why this situation has come to dominate the news. Why didn’t advisors simply use compliant platforms to communicate with their clients? Why didn’t advisors follow FINRA’s digital signature guidance? Why didn’t firms recognize the violations happening right under their noses?

Firms have neglected to update their procedures for reasons ranging from procrastination to resource allocation to “old habits die hard.”

Although viable technology solutions exist to help prevent these very issues, firms have neglected to update their procedures for reasons ranging from procrastination to resource allocation to “old habits die hard.” Now the regulators are here, and the “pound of cure” will be expensive.

In the scramble to avoid the next FINRA penalty, many firms resorted to hiring staff to manually review audit trails for digital signature transactions, a time-consuming and error-prone process, not to mention ironic. This approach drains resources while still leaving room for potential oversights and uncertain effectiveness – the worst of both worlds.

New Solutions For New Problems

Automated surveillance solutions can streamline these processes by programmatically scanning audit trails and flagging suspicious activities in real time. By leveraging such tools, firms can proactively detect and potentially prevent fraudulent activities while also saving valuable time and resources. Combined with digital signatures, automated surveillance can help firms to satisfy FINRA’s supervisory system requirements efficiently and cost-effectively, as well as its specific digital signature guidance.

A First Step Toward Stronger Compliance

Firms should begin their compliance improvement efforts by examining their current methods for procuring digital signatures. Signed documents need much more than the image of a signature pasted onto the page. The ability to verify and prove the validity of the underlying document data is critically important: Were the signing parties properly identified and authenticated? Did the document change? If so, when?

Signed documents need much more than the image of a signature pasted onto the page.

Ideally, firms could immediately verify and validate any signed document without reliance upon the software used to facilitate the signing ceremony – that is, the evidence of the validity of the signed document should reside in the signed document itself. Advanced, cost-effective digital signature solutions already exist that meet these high standards of authenticity, tamper-proofing, and legal validation.

The Importance Of Automated Surveillance

Certain digital signature platforms, such as ours, offer surveillance capabilities that automatically scan the audit trails of documents through every step of the signing process, enabling firms to identify transactions with potential red flags. Leveraging automated processes can help firms stay ahead of the curve by detecting suspicious activities and potential forgeries. Similar to cybersecurity, new methods of digital signature fraud reveal themselves often.

Financial firms without vendors and partners committed to constantly evolving to meet the latest regulations and threats could find themselves in the same boat as their punished peers.