Update on FINRA Regulatory and Examination Priorities

In January, FINRA published its 2017 Regulatory and Examination Priorities Letter.¹ As in years past, FINRA noted its ongoing focus on social media and electronic communications retention and supervision and firm’s hiring and monitoring of “high-risk” brokers. FINRA recently made announcements in furtherance of these focus areas summarized below.

FINRA Speaks to Evolving Communication Technologies

At the end of April, FINRA issued a Notice on “Social Media and Digital Communications,” (Regulatory Notice 17-18) to “provide guidance regarding the application of FINRA Rules governing communications with the public to digital communications.”² FINRA’s Notice recapped its prior guidance on recordkeeping, third-party posts and hyperlinks, and presented questions and answers on these topics:

• Text messaging
• Personal communications
• Hyperlinks and sharing
• Native advertising
• Testimonials and endorsements
• Correction of third-party content
• BrokerCheck

The questions and answers highlighted specific scenarios, and there are several key takeaways for firms:

• Maintain records of electronic communications. Firms must maintain records of business communications with customers and the public. It is irrelevant whether the communication is in print or digital format. Depending on the content of the message, text messages with customers may be required to be maintained.
• Supervise electronic communications. Be aware of your firm’s ability to reasonably supervise and maintain communications before allowing certain communication methods (e.g., text messages, Facebook messages, Tweets, etc.).
• Hyperlinks require additional scrutiny. When using hyperlinks to other websites, it is better to link to the general site, not the content. A firm adopts third-party content by linking to specific content. In such a case, the firm is “responsible for ensuring that, when read in context with the statements in the originating post, the content complies with the same standards as communications created by, or on behalf of the firm.” On the other hand, a firm does not adopt the content of a third-party website by linking to that website (or a section of it) that is “ongoing” and not subject to any influence or control by the firm (no “entanglement”). Of course, a member firm may not a link to any site or content that the firm knows, or has reason to believe, contains false or misleading content.
• Beware of comments and testimonials. Comments and testimonials on social media and other sites are potential regulatory pitfalls. Unsolicited, third-party comments or testimonials on a rep’s social media profile are not communications by the rep or broker-dealer; however, liking or sharing that third-party post adopts it, brings it under the communications rules, and, may either trigger certain disclosure requirements or be prohibited (for example under § 206(4) of the Investment Advisers Act) depending on the circumstances.

While FINRA has attempted to address the industry’s concerns with respect to the increased use of social media sites and evolving technologies to communicate with customers, uncertainties remain due to the ever changing digital landscape.

FINRA Proposes Strengthening Controls on “High-Risk” Brokers

On May 11,2017, FINRA’s Board of Governors approved proposals representing the “next step” in its ongoing initiative to strengthen controls on “high-risk brokers.”³ The FINRA Board approved proposals to:

• Expand sanctions and disciplinary power. The proposals allow tougher sanctions when a broker’s disciplinary history reflects prior misconduct, and enable disciplinary hearing panels to “restrict the activities of firms and individuals” during an appeal of that panel’s decision.
• Require heightened supervision following FINRA discipline. The proposals require firms to adopt heightened supervisory procedures for representatives during FINRA’s review of a statutory disqualification request or during a broker’s appeal of a hearing panel’s decision. The proposals also increase FINRA’s statutory disqualification application fee for individuals and enact a new fee for firms to offset costs from FINRA’s screening of those applications.
• Increase public disclosures by “taping firms.” The proposals require firms to disclose on BrokerCheck if the firm is required by FINRA Rule 3170 to record all customer conversations because a certain percentage of the firm’s representatives were previously associated with “disciplined firms.”⁴
• Broaden waiver review. The proposals revise guidelines for reviewing waiver requests from exam requirements to more broadly consider the “past misconduct of an individual, including arbitration awards and settlements.”

Soon, FINRA will issue Regulatory Notices seeking comment on these proposals and “reinforcing and clarifying existing supervisory obligations” with respect to “high-risk brokers.” Expect FINRA to remain active in this area with further proposals to follow. According to Robert W. Cook, FINRA President and Chief Executive Officer: “These actions will build on FINRA’s extensive existing programs to address high-risk brokers and reflect our commitment to protect investors and promote public confidence in securities firms and markets. We are continuing to develop additional proposals in this area that will be brought to the Board in the coming months.”

¹ 2017 Regulatory and Examination Priorities Letter
² Regulatory Notice 17-18. FINRA has issued other Notices addressing these topics, including “Guidance on Blogs and Social Networking Web Sites,” and “Social Media Websites and the Use of Personal Devices for Business Communications.”
³ FINRA Board Approves Proposals to Strengthen Controls on High-Risk Brokers
⁴ 3170. Tape Recording of Registered Persons by Certain Firms