Articles Tagged with Social Media

On January 4, 2017, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“Priorities Letter”).  The Priorities Letter notifies firms about issues that FINRA intends to examine in 2017.  It is also intended to let firms know which of these issues are relevant to their businesses so that the firms can improve their compliance with FINRA rules and their risk management programs.

According to the Priorities Letter, FINRA draws its examination priorities from both observations made in the course of regulation and suggestions from a variety of outside sources.  Evidence has shown that many FINRA-registered firms have found past Priorities Letters helpful in making sure their business is in compliance with FINRA rules.  Finally, FINRA assures readers of the Priorities Letter that in formulating an examination, FINRA looks to factors such a firm’s “business model, size and complexity of operations, and the nature and extent of a firm’s activities against the priorities outlined in this letter.”

FINRA intends to prioritize the following issues in 2017. Continue reading

On March 23, 2016, the Securities and Exchange Commission (“SEC”) approved the adoption of FINRA Rule 2273, a rule first proposed by the Financial Industry Regulatory Authority (“FINRA”) on December 16, 2015.  Rule 2273 provides that member firms who hire or associate with a registered representative must provide an “educational communication” to the representative’s former and current customers.  The education communication is designed to provide customers with guidance regarding their decision whether to remain customers of that representative.  Rule 2273 went into effect on November 11, 2016.

FINRA’s stated purpose for proposing Rule 2273 was to provide “customers with a more complete picture of the potential implications of a decision to transfer assets.”  The belief was that otherwise, customers would simply rely on their “experience and confidence” with the representative.  FINRA found that such experiences alone do not always guarantee that staying with the representative will be in the customers’ best interests.  Thus, FINRA proposed the educational communication, which contains a number of questions that FINRA believes customers should ask themselves before deciding to remain with the representative. Continue reading

As the use of social media becomes more prevalent and popular, businesses and financial institutions have begun to utilize the new methods of communication that social media can provide. Many businesses already maintain blogs or interactive accounts like Twitter, Facebook, and Instagram as a method of marketing and interacting with clients or prospective customers. However, social media is a relatively new and constantly changing technology that can create unique and unforeseen risks to a businesses image and regulatory compliance policies. These risks are particularly acute for registered investment advisers.

In the broker-dealer world, FINRA has already adopted rules and issued regulatory notices designed to protect investors from false or misleading claims and representations and guide member firms on how to appropriately monitor their social media participation. Although not strictly applicable to pure RIAs, these rules should be viewed as best practices:

  • FINRA Rule 2210 and NASD Rule 3010 govern the supervision of a firm’s social media communications;
  • FINRA Rule 2111 requires that social media communications, if recommending a security, must be considered suitable for the targeted investors; and
  • Record keeping of all social media communications is required under FINRA Rule 4510.

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According to American Century Investments’ third annual Financial Professionals Social Media Adoption Study, more advisers are starting to use various forms of social media for professional uses. The results were drawn from an online survey of 300 financial professionals who are employed as financial advisers, brokers or registered investment advisers. The participants were members of Research Now, and they averaged fourteen years in the financial industry.

The study showed an increase in the use of smartphones and other mobile devices to access social media websites than in previous years. Approximately 35% of advisers claimed to use smartphones for social media access, which is up from the 27% in 2011. Also, there was an increase in advisers who used mobile devices such as iPads and other tablets for access from 11% last year to 22% in 2012. The majority of financial advisers; however, still access social media through laptop and desktop computers.
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In a previous blog, we discussed the Financial Industry Regulatory Authority’s (FINRA’s) proposed Rule 2210 regarding social media. FINRA responded to comments by amending the proposed rule, and filing it with the SEC for approval. The amended rule was designed to respond to concerns about whether certain types of communications should be considered correspondence or public appearances.

In the rule as originally proposed, interactive social media communications would be classified as public appearances such as television interviews, and would have to be filed with regulators. As a result of comments to the proposal, FINRA amended the rule to exclude messages on online interactive forums from a post-use filing requirement.

FINRA explains that the reasoning behind this change is due to the belief that participation in online forums occur in real-time, that it is not practical to require pre-use approval of such postings by a principal, and that these types of communications should be classified as retail communications. According to FINRA, “retail communication would include any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. ‘Retail investor would include any person other than an institutional investor, regardless of whether the person has an account with the member.'” This means that the retail communication category would instead be supervised by broker-dealers in the same manner as correspondence.
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The Securities and Exchange Commission (SEC) recently issued a National Examination Risk Alert to investment advisers discussing the use of social media. Social media is becoming more widely used as a means to communicate with investors, and advisers need to ensure they are meeting their compliance requirements. The purpose of the alert is to inform advisers of ways they can improve and maintain sufficient compliance practices in using social media websites.

The SEC listed a number of issues for firms to consider as they evaluate the effectiveness of their compliance programs. Among all of the guidelines, some areas firms are encouraged to consider include:

  • Whether they want to create usage guidelines to address which social media networks are appropriate for use and restrictions which may be appropriate for each network;
  • Whether to create content standards to prohibit specific content or impose other restrictions in relation to their social media networks;
  • How their compliance or supervisory personnel can adequately monitor the sites, and how frequently they should be monitored;
  • Whether content must be pre-approved before posting to a site;
  • Whether there are adequate resources dedicated to monitor the activity adequately on the social media sites;
  • Developing criteria for allowing participation by third parties ;
  • Implementing training related to social media-related compliance practices;
  • Whether certification should be required to ensure that those individuals using the social media sites understand and are complying with the firm’s internal policies;
  • Whether to adopt policies distinguishing between personal and professional sites, possibly specifying the types of communication about the firm which are acceptable on a site not maintained by the firm; and
  • How to maintain information security.

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The Securities and Exchange Commission (SEC) recently filed a cease-and-desist order against an Illinois man, Anthony Fields, for scamming investors with a fictitious securities offering. Fields attempted to sell more than $500 billion in securities using various social media websites, including LinkedIn.

Fields claimed to be a representative of a “leading institutional broker-dealer” through his firms: Anthony Fields & Associates and Platinum Securities Brokers. He was not registered as a broker/dealer with the SEC nor was he licensed as an associate with a registered broker/dealer.

The SEC has claimed that Fields violated numerous securities regulations. Allegedly, he promoted fictitious bank guarantees by setting up an unfunded investment adviser and an unfunded broker-dealer. He registered both of these with the SEC; however, he did so by filing false applications in March 2010. He also failed to maintain adequate books and records or carry out proper compliance procedures. Finally, he overstated his assets under management by claiming he had $400 million when, in actuality, he had none.
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More and more brokers and investment advisers are becoming familiar with the applicable social media regulations, including those described in FINRA Regulatory Notice 10-06, to put into place procedures that permit the wide use of social media for marketing purposes. These social media sites are proving an invaluable way to create and build client relationships, referral networks and other marketing opportunities. While this guidance was welcomed by firms, much of FINRA’s guidance is proving incomplete, as broker-dealers struggle to find ways, for example, to implement procedures to comply with FINRA’s record-keeping and other requirements.

Subject firms wishing to employ greater social media need to make sure that they follow FINRA’s requirements and those of the Exchange Act, the Investment Adviser’s Act and applicable state law. The most important factor is, of course, full, accurate, fair, complete and honest disclosures particularly on those pages that are permanent as opposed to transient messages. As FINRA made clear, all social media records, even Tweets and Facebook wall postings, must be maintained by the firm as part of their supervision. Additionally, a firm needs to set a written social media policy and follow the policy thoroughly.

From a compliance standpoint, for entities subject to FINRA rules, it is important to realize that blog posts, websites, banner ads, bulletin boards and static content on social media sites are considered advertisements under Rule 2210 and thus subject to the detailed requirements of that rule, including principal review or approval prior to posting for publication. This includes profile, background and wall information.
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