Digital Communications Compliance Highlighted at the FINRA 2022 Advertising Regulations Conference
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Given FINRA’s 2022 priorities announced back in January and continuous crackdown on encrypted apps, it’s no surprise that the Digital Communications and Social Media session was the most popular session at FINRA’s recent Advertising Regulations Conference.
Session attendees were polled on various topics, and a couple stood out:
On using virtual tools
When asked if they currently use virtual tools such as conferencing platforms, visual aids, and chat features with clients, 75% of session attendees said they do.
This isn't a problem, but FINRA's message is clear.
Firms should "only use what they can supervise."
Firms should "only use what they can supervise."
While there may be some flexibility on how to supervise these activities, FINRA reinforced that all required business records should be retained regardless of the communication channel being used.
Firms should ensure they have developed their policies, procedures, and controls to reflect the use of these virtual tools. FINRA noted the following best practices regarding their use:
- Understand how to record and supervise the tools' features
- Know if features can be shut off if they are prohibited
- Create a response plan for potential issues
FINRA also reminded firms that any visual aids would be categorized as correspondence, retail, or institutional communications, depending on the audience. Under Rule 2210, note cards, scripts, or slides used during a live appearance, such as a Zoom or Microsoft Teams meeting, would also be considered communications that need to be captured.
On using social media
When asked if they partner with social media influencers, 16% of session attendees said they do.
Given FINRA’s current targeted exam on social media influencers (or finfluencers), many attendees seemed interested to hear the regulator’s thoughts on best practices when dealing with influencers. Combine that with the SEC’s recent modernized Marketing Rule and you have one hot topic.
Firms should be aware that regulators will consider this type of content “entangled” with the firm (see FINRA Regulatory Notice 10-06 and 11-39), meaning it’s treated as communication with the public.
It’s recommended to follow these best practices when partnering with social media influencers:
- When engaging with an influencer, start with a detailed questionnaire to detect any conflicts of interest or disqualification events
- Set expectations during the contract process to set appropriate parameters and monitoring of the influencer’s activities
- Ensure disclosures were correct and complete, especially with complex products, including any risk, restrictions, or compensation (“#PAID” disclosure was suggested)
- Ensure the content standards under Rule 2210 are satisfied
- Include the member’s name on the advertisement as well as clearly identifying which entity offers which services, as applicable
- Enhance supervision in the area and increase the training used with regards to influencers
There has been no shortage of new mobile applications and other digital platforms developed to engage with clients, bringing more access to the market. But regulators have been concerned that digital engagement practices prompt certain behaviors and that proper investor protections are not being applied.
FINRA noted that while these engagement practices are not inherently bad, there is a potential for conflicts of interest. Among issues noted were more frequent trading and prompting risky behaviors among users.
To help ensure that these features comply with FINRA’s rules, FINRA suggested firms include compliance in the development of these practices before they are integrated, as well as constant monitoring to ensure they are working correctly. Firms will need to evaluate how recordkeeping and supervision of digital engagement practices may differ from more traditional methods.
With the SEC expected to release proposed rules for Digital Engagement Practices for Broker-Dealers before the end of the year and FINRA conducting targeted exams of the use of mobile applications, I would expect this to remain at the forefront of regulatory compliance.
Whether or not your firm uses virtual communication tools or social media, the resounding message throughout this year’s conference was that recordkeeping is paramount to the firm’s ability to comply with regulations.
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