Compliance
Advisers Using Social Media in Their Businesses Must Tread Carefully
Wednesday, August 31, 2011 14:58

FINRA’s first effort, Regulatory Notice 10-06, seemed to raise as many questions as it answered. Now  FINRA has issued further guidance with the issuance of Regulatory Notice 11-39 (“RN 11-39”), which is meant to supplement, not supplant, Regulatory Notice 10-06. 

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In RN 11-39 FINRA made clear that regardless of all the new communication methods available, when licensed securities personnel and their member firms share information with their clients or the public, those communications are still subject to all FINRA recordkeeping, suitability, supervision and content requirements. So, how do you know what kinds of Internet communications are permitted? And, even if allowed under FINRA and SEC rules, what regulatory requirements do you a need to keep in mind to make it easier to get your B/D to approve your initiative?
 
A.        Are your Internet Activities “Business Communications”?
Determining whether your new blog or other content you create requires pre-approval of your B/D boils down to this key issue: is it a “business communication?”

If it is, then your B/D must follow federal securities laws and FINRA rules governing review, approval, retention, and access to the content. 

Essentiallty, if you plan to use a social media site for business purposes, then a registered principal of your firm must review the site with your content and profille in “launch format” prior to your first posting.
 
Whether your proposed posting is a business communication is not determined by the type of device you using to post content. Whether you post from a computer, tablet, or mobile phone does not matter. Nor does it matter whether you’re posting using a company-owned or personal device. It's the content of your postings that matters.
 
B.        How Does Supervision of Your Social Media Postings Work?
Once you have gained approval for your new social media pages, the way you use itdetermines how your B/D must monitor your activities.
 
Witgh regard to unscripted comments in public chat forums, FINRA does not object to these kinds of discussions as long as the activity is permitted by your B/D's rules. 
 
FINRA treats appearances on a live interactive forums, such as a webinar or live online public chat, as a “public appearance.” That does not require your B/D to pre-approve the content.
 
This includes responding to inquiries from the investing public about securities. 
 
However, many B/Ds have policies about how to handle these kinds of inquiries and often require advisers to use pre-approved “canned” responses that direct investors to move any further dialogue over to firm-monitored e-mail systems. 
 
Keep in mind that, before you decide to create or write for any Internet site, the “guts” of the site’s programming must be formatted in a way that enables your firm to conduct post-posting reviews of what you have written and to retain copies of all your content. 

RN 11-39 implicitly suggests Member Firms use key-word searches or other algorithms that are designed to scan content and alert a compliance executive to review questionable postings.
 
In short, while your B/D will not be reviewing what you write before you post, you should always assume that that it will be looking over your shoulder after the fact, particularly given the heightened attention FINRA is giving this issue.
 
C.        Differences Between Interactive Communications and Articles
 
Once you have finished an interactive discussion on your social media site, can you immediately copy and paste to create a permanent article on your website and get the most mileage out of your work? RN 11-39 makes clear that the answer is no. 

Under RN 11-39, before social media postings can be converted to “static” articles that are preserved on a website for future viewing, the content must be reviewed and approved in advance by a registered principal of your firm, because the content constitutes an “advertisement” under applicable NASD rules. 

Remember too, that if you later make a “material” update or change to the article, the revised document must be approved again before you post it; from FINRA’s standpoint.
 
D.        What About Providing Viewers Access to Content Generated by Others?
 
Many advisers want to provide clients access to content generated by third-parties. In RN 11-39, FINRA has made clear that such linkages create regulatory issues, and must be monitored carefully.
 
Specifically, RN 11-39 advises Member Firms that they will become responsible for all content on third-party linked sites where the firm either “adopts” or “becomes entangled” with the material, even if the firm had nothing to do with creating it.
 
What kinds of content will raise a red flag with Compliance and may  put your firm at risk of being deemed to have adopted the content at a third=party website?
  • Any statements which imply that you or the B/D endorse or agree with the material on the third-party site;
  • Co-Branding any part of the third-party site (such as including a firm logo on the home page or any sub-page);
  • Your involvement in helping to develop the third-party site; or
  • Your involvement in developing content for the site
E.         Conclusion
RN 11-39 is FINRA’s latest effort to balance financial professionals’ desire to take advantage of the Internet’s communication revolution with its regulatory mandate to ensure Associated Persons’ activities are effectively monitored and the investing public is protected.

Before moving forward with your plan to employ social media, coordinate the effort with your firm’s Compliance department, and continue to confer once your site has gone live. 

Social media can be a powerful tool, but not if it comes at the cost of a FINRA inquiry or termination that marks up your Form U-4.
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Get Ready For Congressional SRO Hearings In Two Weeks
Tuesday, August 30, 2011 08:17

Tags: Dodd-Frank | SRO

The House of Representatives has reportedly scheduled September 13 as the date when formal debate on whether investment advisors should switch to a self-regulated model.

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Although there's nothing on the calendar yet, Advisor One has learned that a House subcommittee is talking about the SRO in two weeks.

 

We'll be watching to see who the people and groups invited to provide testimony are. Expect at least FINRA to show up to pitch the case that self-regulation -- under the FINRA umbrella or otherwise -- for advisors won't be so bad.

 

The case for the opposition is more fragmented. Who will Congress invite to argue against a self-regulatory organization for advisors? 

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Follow-up Information for the Webinar, “The Switch Is On Again For RIAs”
Friday, August 26, 2011 14:58

 A lot of important information regarding the upcoming requirement for mid-sized advisors to switch from SEC to state registration was provided during the recent webinar, “The Switch is On Again for RIAs”, hosted by Advisor4Advisor and presented by Tammy Emsick of RIA Compliance Consultants. Therefore, we would like reiterate a few of the main points presented during this webinar.

 

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Investment advisors with less than $25 million in assets under management will continue to be state registered and advisors that qualify for SEC registration will continue to notice file with the appropriate state regulatory authorities. Investment advisors with assets under management between $25 million and $100 million (“mid-sized advisors”) will need to switch from SEC to state registration unless the advisor is not required to be registered as an investment advisor with the state securities authority in the state where it maintains its principal office and place of business; the advisor is not subject to examination as an advisor in the state where it maintains its principal office and place of business; or the advisor qualifies for an exemption under Rule 203A-2 of the Investment Advisers Act of 1940.
 
The following are the key dates that all investment advisors currently registered with the SEC will need to be aware of: 
 
  • All mid-sized investment advisors registered with the SEC as of July 21, 2011, must remain SEC registered until after January 1, 2012.
  • All investment advisors registered with the SEC as of January 1, 2012 are required to file an amendment to their Form ADV Part 1 by March 30, 2012. This is regardless of the firms fiscal year end, although it may coincide with the Form ADV annual update filing for many SEC investment advisors.
  • By June 28, 2012, all mid-sized investment advisors that no longer qualify for SEC registration after January 1, 2012 must become state registered and file a Form ADV-W to withdraw from SEC registration.
  • After June 28, 2012 the SEC will cancel registrations of investment advisors no longer eligible to register with the SEC that fail to file the Form ADV amendment or withdraw their registrations.
 
Mid-sized advisors may be able to start applying for registration with state securities regulators at this time, but the investment advisor should first check with the appropriate state securities regulator(s) to make sure the state will not object to the investment advisor´s dual registration as an investment advisor with the state securities regulator and the SEC until the firm is able to withdraw from SEC registration after January 1, 2012. Every state securities regulator has its own investment advisor registration requirements and additional documentation may be required to be submitted along with the Form ADV. In the SEC final rule release regarding the switch, the SEC indicated that they estimate approximately 3,200 SEC registered investment advisors will be required to withdraw their registrations and register with one or more state securities authorities. This will likely mean that state regulators are going to be extremely busy reviewing registration applications during the first six-months of 2012. Investment advisors that need to switch to SEC registration should plan accordingly so that they will meet all of the required deadlines.
 
Finally, investment advisors that switch to state registration must keep in mind that along with making changes to the Form ADV, advisors’ client agreements and written supervisory procedures will probably need to be updated.
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Dodd-Frank Doesn't Have To Be Expensive, Compliance Officers Say
Friday, August 26, 2011 07:35

Tags: compliance | Dodd-Frank

With "soaring regulatory costs" at the top of many advisors' list of potential headaches, it's surprising that the compliance industry sees spending staying right where it is.

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In fact, 75% of all compliance officers say their 2011 budget will be exactly where it was last year, according to a survey that National Regulatory Services ran in the first quarter.

 

And those compliance officers apparently haven't gotten a raise in three years.

 

Part of that's because compliance remains just one of many hats these people wear. Only 25% of the chief compliance officers out there spend 90% or more of their time dealing with the regulations.

 

The average compliance budget -- people, technology, and materials -- was in the $50,000 to $75,000 range last year, and so will probably remain in that area in 2011.

 

All of this is shocking, given the amount of fear we've seen about new regulations and the number of times we're told that Dodd-Frank is killing the business.

 

When confronted with the apparently contrarian numbers, John Gebauer of NRS simply said the compliance officers surveyed are wrong.

 

"Despite the survey results, the reality is more regulations will be coming down the line," he told Financial Planning. "Most compliance staffs have already been trimmed and they can’t absorb the extra work. I think companies will be forced to spend more in the near future.”

 

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Big Surprise: Advisors Nervous About Regulation Are Spending More On Compliance
Wednesday, August 17, 2011 07:35

Tags: compliance

Advisory firms are spending a lot more money on high-tech solutions to regulatory problems, according to the latest numbers from auditors at KPMG.

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KPMG polled 100 investment managers and found that 70 of them were "concerned" by the current regulatory environment.

 

In fact, a full 61 of the people the auditors talked to say regulation is the single biggest threat to their growth.

 

To address the challenge, they're investing in stronger technology in the office as well as reviewing their existing procedures and policies.

 

Many needed to upgrade their computers anyway, KPMG says, and so the need to adjust cost basis reporting and comply with other new regulations is simply providing a fresh incentive.

 

And once again, most advisory firms expect to boost their payrolls in the current year, but only by 3% to 4%.

 

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