Securities Compliance Sentinel - Analysis of Cutting Edge Securities Industry Issues

At a regulator's round table during a recent National Society of Compliance Professionals meeting, the regulators framed out those issues that are keeping them up at night.  The issues include:

1. The increasing complexity of investment products.
2. Social media beyond things like Twitter or LinkedIn.
3. Cyber security.
4. Cyber fraud; i.e. hacking into customer accounts.
5. AML issues where broker-dealers are connected to banks.

This panel also noted that one of the more common deficiencies being seen is the lack of suitability analysis when it comes to complex products.  In addition, they noted that there have been more exceptions when it comes to proper supervision.

It almost goes without question that, if the regulators are focused on certain areas, you need to share that focus.  Revisit your WSPs and practices and procedures.  Make the necessary changes, and avoid sleepless nights.

In recognition of the pervasive use of social media, the SEC recently issued guidance that public companies could disseminate material information through social media without violating Regulation FD.  The question remains what is the best way to use social media in this fashion.

The critical aspect of complying with Regulation FD is to make sure that the public knows that you social media channel of choice is a “recognized channel of distribution”.  The public must be provided appropriate notice of the channels that the company will use to distribute this information.

In other words, an executive disclosing information on his/her personal social media site without advance notice to the public would not be in conformity with this guidance.  Personal social media is not seen as a source of information through which a company would report.

Feel free to use social media to distribute information.  But be certain that the public knows you will use social media before you do so.  If you need help on this issue, let me know.

On January 1, 2013, California joined Maryland and Illinois in restricting securities employers' access to their employees' and job applicants' social media accounts.  This new law was announced on Twitter, and provides that an employer cannot require or request an employee or applicant to:

• disclose a user name or password for the purpose of accessing personal social media;
• access personal social media in the presence of the employer; or
• divulge any personal social media, except as provided in subdivision.

The law also prohibits discharging, disciplining, or retaliating against an employee or applicant by an employer who violates this law.  Employers may still terminate or sanction an employee or applicant if there is some other law that would allow such termination or sanction.  Further, such information may still be requested if it is relevant to an investigation or allegation of employee misconduct or violation of applicable laws and regulations.  However, the information may only be used for that investigation or a related proceeding.  Additionally, in what may be somewhat of a saving grace, the law does not apply to employer-issued electronic devices. 

California joins a growing number of states who are restricting securities employers from having access to their employees’ social media.  Time will tell if this legislation is wise or opens up a giant loophole for securities fraud.

Much like the character in the famous Nathaniel Hawthorne story, FINRA is looking force broker-dealers to wear a mark on all of their social media.  FINRA wants to amend Rule 2267, forcing member firms to have a link to BrokerCheck on the websites and all other forms of social media.

The stated purpose of doing so is to create better consumer awareness for BrokerCheck.  As it currently stands, member firms must annually provide their customers written notice regarding the existence of BrokerCheck and how to access it.  Is this move really necessary?

Unfortunately, studies mandated by Dodd-Frank reflect that consumers are generally unaware of the resource that BrokerCheck has become for consumers to review information about member firms and registered representatives.  In light of these findings, it seems like a safe bet that this rule change will come to pass.

What should member firms do in anticipation for this change? 

Make sure you push the culture of compliance at your firm.  Any reportable events will be more easily found by existing and potential customers.  Do what you can to avoid these events, and wearing the scarlet letter of BrokerCheck will be just another link in social media.

 * photo by Freedigitalphotos.net