Tag: FINRA

SEC Study on Enhancing Investment Adviser Examinations

Now that most private funds managers are required to register with SEC as investment advisers, the SEC is considering abandoning them to regulation by FINRA.

The SEC released the much anticipated report, a 40-page “ Study on Enhancing Investment Adviser Examinations” mandated by Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The report is more a plea for resources than an abandonment. The report makes a simple statement: ” the Commission will likely not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisers with adequate frequency. The report points out that the frequency of examination is a function of the number of registered investment advisers (and their complexity) and the amount of SEC’s OCIE staff dedicated to examination. While the number of advisers and their complexity have increased, the staff of OCIE has decreased. The complexity will only increase as thousands of private fund managers come under the registered investment adviser umbrella.

The SEC staff recommended three options for Congress to consider:

  1. Self-Funding Authorize the SEC to impose user fees on registered investment advisers.
  2. Self Regulatory Organization Authorize one or more SROs, under SEC oversight, to examine all registered investment advisers.
  3. Limited SRO Authorize FINRA to examine all of its members that are also registered as investment advisers for compliance with the Advisers Act.

I read the report as a plea for more resources to oversee investment advisers.

Dodd-Frank is clearly pulling private fund managers into the domain of the Investment Advisers Act. That will require extra resources. On the other hand, they are kicking advisers with less than $100 million in assets out for SEC oversight and over to state registration and oversight. It’s unclear if that trade will result in more, less or about the same number of advisers under SEC oversight. The SEC has stated that about 3,500 advisers will go over to the states. They can only guess how many fund managers will become new registrants. (My guess is that the SEC will have a net loss.)

The report is interesting but holds not legal influence. All of the recommendations require Congressional action. My perception of Congress is that little will be done that helps Dodd-Frank during the next two years.  I doubt they will give up the appropriations as a control method over the SEC.

In addition to the official report, Commissioner Elisse Walter issued a separate dissenting opinion expressing her disappointment with the SEC’s final report and reiterating her stance in favor of an SRO, citing funding as an issue that is too great to overcome both in the short and long terms.

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Disciplinary Actions Against Chief Compliance Officers

The Chief Compliance Officer should be a model for employee conduct. I don’t thing there is any better way to lead and educate than to set an example.

Not all Chief Compliance Officers succeed in this role and some get subject to discipline. Here are some ways to get in trouble.

Participation in Wrongful Conduct

David A. Zwick, chief executive officer and chief compliance officer of Suncoast Capital Group, Ltd. was held liable for participating in a scheme with a salesperson he supervised to provide kickbacks to a bond trader.  In exchange for the kickbacks, Suncoast received securities transactions at prices favoring Suncoast and provided signification compensation to Zwick. He was found to have knowingly or recklessly approved fraudulent prices on Suncoast trades.

Failure to Supervise

In its release for Rule 206(4)-7 SEC Release No. IA-2204 the SEC stated:

Having the title of chief compliance officer does not, in and of itself, carry supervisory responsibilities. Thus, a chief compliance officer … would not necessarily be subject to a sanction by us for failure to supervise other advisory personnel. … Section 203(e)(6) provides that a person shall not be deemed to have failed to reasonably supervise another person if: (i) the adviser had adopted procedures reasonably designed to prevent and detect violations of the federal securities laws; (ii) the adviser had a system in place for applying the procedures; and (iii) the supervising person had reasonably discharged his supervisory responsibilities in accordance with the procedures and had no reason to believe the supervised person was not complying with the procedures.

Clearly a CCO has a role in addressing serious misconduct by employees. For an investment adviser, the CCO could be a supervisor and the failure to adequately supervise could subject the CCO to discipline for failure to supervise.

Pre-packaged policies and procedures manual

Consulting Services Group did that and failed to meet the SEC’s standards. Unfortunately for them, the pre-packaged manual did not match up to its business. They provide consulting services to mostly institutional clients. It helps them search for and select money managers, allocate assets, review performance, and design investment policies. The pre-packaged policies and procedures manual “failed to address adequately the conflicts of interest unique to CSG’s operations as a pension consultant, and many of the sections within these generic forms were completely inapplicable and irrelevant to CSG’s provision of investment advisory services to clients.” I would guess they manual they bought was designed for a retail investment adviser.

Email server

Among the things Richard Campanella was disciplined for was the failure to stop the use of non-company email. He received several emails from an employee and told him to stop using the outside email address. Even after three warnings, he field to discipline the employee. Apparently, the employee used the email extensively for business purposes. The end result was record-keeping failure.

Background checks

Westpark Capital’s Chief Compliance Officer was William Morgan. “Among other things, Morgan was responsible for maintaining and updating the Firm’s written supervisory procedures, supervising the branch office managers, performing background investigations and participating in hiring decisions, and determining whether representatives required heightened supervision and the parameters of that heightened scrutiny.” Unfortunately, the company hired some representatives who engaged in churning and made unauthorized and unsuitable trades in customer accounts.

Reporting

Tim Poulus, the Chief Compliance Officer for Olympia Asset Management, failed to report customer complaints to FINRA. (FINRA Case #2008011806301) That statistical and summary information required by NASD Rule 3070(c). The violation lead to a $10,000 fine.

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Fail is by Amboo who?

You know you’ve failed as a CCO when you get barred by FINRA

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The Financial Industry Regulatory Authority permanently barred Tod Bretton, former chief compliance officer and head trader for Prestige Financial Center, Inc.

“FINRA found that, from at least September 2006 through June 2009, Bretton, working from the firm’s New York office, engaged in a fraudulent trading scheme in which he took advantage of customers placing large orders (generally 1,000 shares or more) to buy or sell stocks. Rather than effecting the trades in the customers’ accounts, FINRA found, Bretton first placed the orders in a firm proprietary account. He would then increase the price per share for securities purchased by approximately $.02 to $.05 above the market price before allocating the shares to the customers’ accounts. Similarly, he would decrease the price per share for securities sold by approximately $.02 to $.05 below the market price before allocating the proceeds to the customers’ accounts. This improper price change was not disclosed to or authorized by the customers.”

In settling this matter, Bretton neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. Regardless of whether he admits the charges, he is barred from associating with any FINRA member in any capacity.

It seems that Mr. Bretton was a bad choice for CCO at his former firm.

I was also disappointed to see that the BrokerCheck did not throw up a bigger red flag for this type of discipline. After all, this is a permanent bar. The BrokerCheck webpage for Tod Bretton just states that there are events disclosed in the Detailed Report. You have to get to the ninth page to find out that he is under a permanent bar.

I understand the difficult issues with disclosing disciplinary actions, since some may be unfounded or of little merit. Bretton got the nuclear discipline, ending his career with securities. Such a definitive and absolute result should be made more obvious.

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FINRA Guidance on Private Placements

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The Financial Industry Regulatory Authority released Regulatory Notice 10-22 reminding registered firms about their obligations regarding suitability, disclosures and other requirements for selling private placements to customers.

A Broker-Dealer that recommends a security is under a duty to conduct a reasonable investigation concerning that security and the issuer’s representations about it. This is true regardless of the type of security. The “reasonable” standard for the investigation depends on many factors including the nature of the recommendation, the role of the broker-dealer in the transaction, its knowledge of and relationship to the issuer, and the issuer itself.

NASD Rule 2310 requires a broker-dealer to have reasonable grounds to believe that a recommendation to purchase, sell or exchange a security is suitable for the customer. That means they must have a reasonable basis to to determine that the recommendation is suitable for at least some investors. Then they have to determine that it is suitable for the specific customer.

The fact that an investor meets the net worth or income test for being an accredited investor is only one factor to be considered in the course of a complete suitability analysis. In a Regulation D offering the broker-dealer should, at a minimum, conduct a reasonable investigation concerning:

  • the issuer and its management;
  • the business prospects of the issuer;
  • the assets held by or to be acquired by the issuer;
  • the claims being made; and
  • the intended use of proceeds of the offering

Although the “reasonable investigation” must be tailored to each private placement, the regulatory notice provides a list of best practices gathered from member firms.

A. Issuer and Management. Reasonable investigations of the issuer and its management concerning the issuer’s
history and management’s background and qualifications to conduct the business might include:

  • Examining the issuer’s governing documents, including any charter, bylaws and partnership agreement, noting particularly the amount of its authorized stock and any restriction on its activities. If the issuer is a corporation, a BD might determine whether it has perpetual existence.
  • Examining historical financial statements of the issuer and its affiliates, with particular focus, if available, on financial statements that have been audited by an independent certified public accountant and auditor letters to management.
  • Looking for any trends indicated by the financial statements.
  • Inquiring about the business of affiliates of the issuer and the extent to which any cash needs or other expectations for the affiliate might affect the business prospects of the issuer.
  • Inquiring about internal audit controls of the issuer.
  • Contacting customers and suppliers regarding their dealing with the issuer.
  • Reviewing the issuer’s contracts, leases, mortgages, financing arrangements, contractual arrangements between the issuer and its management, employment agreements and stock option plans.
  • Inquiring about past securities offerings by the issuer and the degree of their success while keeping in mind that simply because a certain product or sponsor historically met obligations to investors, there are no guarantees that it will continue to do so, particularly if the issuer has been dependent on continuously raising new capital. This inquiry could be especially important for any blind pool or blank-check offering.
  • Inquiring about pending litigation of the issuer or its affiliates.
  • Inquiring about previous or potential regulatory or disciplinary problems of the issuer. A BD might make a credit check of the issuer.
  • Making reasonable inquiries concerning the issuer’s management. A BD might inquire about such issues as the expertise of management for the issuer’s business and the extent to which management has changed or is expected to change. For example, a BD might inquire about any regulatory or disciplinary history on the part of management and any loans or other transactions between the issuer or its affiliates and members of management that might be inappropriate or might otherwise affect the issuer’s business.
  • Inquiring about the forms and amount of management compensation, who determines the compensation and the extent to which the forms of compensation could present serious conflicts of interest. A BD might make similar inquiries concerning the qualifications and integrity of any board of directors or similar body of the issuer.
  • Inquiring about the length of time that the issuer has been in business and whether the focus of its business is expected to change.

B. Issuer’s Business Prospects. Reasonable investigations of the issuer’s business prospects, and the relationship of those prospects to the proposed price of the securities being offered, might include:

  • Inquiring about the viability of any patent or other intellectual property rights held by the issuer.
  • Inquiring about the industry in which the issuer conducts its business, the prospects for that industry, any existing or potential regulatory restrictions on that business and the competitive position of the issuer.
  • Requesting any business plan, business model or other description of the business intentions of the issuer and its management and their expectations for the business, and analyzing management’s assumptions upon which any business forecast is based. A BD might test models with information from representative assets to validate projected returns, break-even points and similar information provided to investors.
  • Requesting financial models used to generate projections or targeted returns.
  • Maintaining in the BD’s files a summary of the analysis that was performed on financial models provided by the issuer that detail the results of any stress tests performed on the issuer’s assumptions and projections.

C. Issuer’s Assets. Reasonable investigations of the quality of the assets and facilities of the issuer might include:

  • Visiting and inspecting a sample of the issuer’s assets and facilities to determine whether the value of assets reflected in the financial statements is reasonable and that management’s assertions concerning the condition of the issuer’s physical plants and the adequacy of its equipment are accurate.
  • Carefully examining any geological, land use, engineering or other reports by third-party experts that may raise red flags.
  • Obtaining, with respect to energy development and exploration programs, expert opinions from engineers, geologists and others are necessary as a basis for determining the suitability of the investment prior to recommending the security to investors.

“An increase in investor complaints regarding private placements, as well as SEC actions halting sales of certain private placement offerings, led FINRA to launch a nationwide initiative that involves active examinations and investigations of broker-dealers engaged in retail sales of private placement interests,” said FINRA Chairman and CEO Rick Ketchum.

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FINRA and Placement Agents

Will FINRA step in to prevent a ban on placement agents working with government investors?

You may remember that last August, the SEC published a proposed rule that would create a prohibition on paying a third party, such as a placement agent, to solicit a government client on behalf of the investment adviser: IA-2910. The rule has generated lots of comments. The intent of the proposed rule is to prevent “pay-to-play” scandals. A noble and worthy goal.

The SEC seems to be softening its position on the placement agent ban. In a December 18 letter, the SEC asked FINRA if they would interested in crafting some rules for registered broker-dealers in dealing with government investors. Legitimate placement agents (such as FINRA-registered broker-dealers) “could be subject to separate regulations that might restrict their ability to engage in pay to play activities on behalf of their investment adviser clients.”

It took three months, but FINRA responded to the SEC with a “yes“.

“I am delighted to state that we are in a position to promulgate such a rule. We believe that the FINRA proposal should impose regulatory requirements on member broker-dealer placement agents as rigorous and as expansive as would be imposed by the SEC on investment advisers. We believe that a regulatory scheme targeting improper pay to play practices by broker-dealers acting on behalf of investment advisers is both a viable solution to a ban on certain private placement agents serving a legitimate function.”

It sounds like SEC is getting closer on making a decision about its pay to play rule. Perhaps the FINRA rule will make it easier to deal with.

In the interest of disclosure, my company uses placement agents in its dealings with investors, including government investors.

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Implementing Compliance Practices for Social Media

I was in the audience for FINRA’s latest educational Program: Implementing Compliance Practices for Social Media.

This program addressed implementation of new guidance that FINRA recently issued in , concerning social media.

Introduction

Tom Pappas

FINRA does not endorse any particular practice and each firm will have to do things differently. The views in this webinar will not provide a safe harbor.

Summary of FINRA Regulatory Notice 10-06, Guidance on Blogs and Social Networking Web Sites

Joseph Savage

addresses five different areas:

Recording-Keeping. You need to keep copies of the information you publish, regardless of the form. FINRA is aware that it’s not easy to capture this information when using third-party sites like Facebook. (Tough. Deal with it). You can file screenshots with FINRA.

Suitability responsibilities (Notice to Members 01-23). You are better off not recommending any specific investments.

Types of interactive electronic forums. Generally, postings will be considered advertisement, but interactive postings are a public appearance (so you do not need principal approval). They felt that Twitter posts and Facebook updates would be interactive electronic forums.

Supervision of social media sites (Regulatory Notice 07-59). This should be a risk-based review.

Third-party posts (“Adoption” and “Entanglement”). Generally, third party content is out of your control. But if you arrange for third party content or endorses it, then you may be deemed to have adopted that content and treat it as if you adopted it directly.

The notice is just guidance, not a rule. FINRA is looking at a new rule. See Regulatory Notice 09-55.

Firms’ Perspectives: Is Social Media Right for Your Firm?

Doug Preston & Joanne Rodgers

Doug pointed out the tremendous growth of social media. Regardless of the form and how it works, you need to use the sites in compliance with rules. (The rules are not going to adapt to social media.)

Joanne is doing a pilot with a vendor to help with compliance. They had lots of requests from recruiting and sales to use the tools.

If you use a social media site for personal purposes, can you still list that you work for the financial services company? You can have a “business card rule.” Just post the information on your business card, with no call to action or specific information.

Is this a growth area or just customer pressure? They have no data. Sales really want to use the tools to generate business. They view it more as a lead generation instead of a sales tool. Recruiting is an avid user of social media sites, especially LinkedIn.

Nobody has much data on the cost/benefit of using social media sites.

Firms’ Perspectives: Developing Social Media Pilot Programs

Doug Preston & Joanne Rodgers

Joanne has just finished a pilot for 25 agents and 25 recruiters. She saw that most of the agents participated in Facebook, more personal than business. The recruiters mostly used LinkedIn. (She did not want to disclose the vendor she used.)

Doug has not opened up the broker side to social media. The bank side does use it. They using some of that learning to build a system for the broker side.

One issue is the level of activity and the additional resources needed to review activity. The tools may be free, but they require people resources and time.

The key is the ability to obtain and retrieve the records and to move the records into your email surveillance program. It’s also important to be able to shut off some of the functionality on social media sites.

Firms’ Perspectives: Compliance Practices Concerning Social Media

Doug Preston & Joanne Rodgers

There are lots of risks. You need to draw a line between sites you control and those run by third parties. You can stuff on a blog you host that you can’t do on a third party blog platform.

You will need new processes and policies. You will need lots of training.

FINRA is ahead of the curve compared to some other regulators in the financial services industry. Insurance regulators have not addressed the use of social media.

One of the big risks is brand/reputation risk. Each of the registered representatives becomes a brand ambassador. If they say some thing bad or embarrassing it affects the company as well as themselves.

What is FINRA looking for? If you are using social media, they will want to see: written procedures, actual supervision, records and procedures.

They did not like LinkedIn recommendations. Registered representatives should not accept the recommendations.

The static versus interactive categories is the toughest one to deal with.

Third-Party Postings

Joseph Savage, Doug Preston, Joanne Rodgers, & Joseph Savage

Questions 8, 9 & 10 in address the issue of third party posts. You probably should put in a disclaimer if you let third party posts on your site. You should monitor them to make sure there is no inappropriate material (porn, copyright). You also need to monitor complaints.

A reg. rep. “favoriting” something or “liking” something could be considered adopting that third party statement.

Program Summary

The session should be available online in a few weeks.

FACULTY

Tom Pappas (Moderator) is Vice President and Director of FINRA’s Advertising Regulation Department. The department regulates the advertisements, sales literature and correspondence used by FINRA firms. His responsibilities include rule development, management of the filing and surveillance programs and related enforcement activities. He served in the same role at NASD before its 2007 consolidation with NYSE Member Regulation, which resulted in the formation of FINRA. He joined NASD in 1984 and was previously with Davenport & Company LLC. He received a bachelor’s degree from The University of Richmond and an M.B.A. from Virginia Commonwealth University.

Douglas Preston is a Senior Vice President and Compliance Executive at Bank of America Merrill Lynch (BAML), as well as Chief Compliance Officer for Merrill Lynch Professional Clearing Corporation, the firm’s prime brokerage arm. He is also responsible for a number of other compliance areas at the firm, including serving as the Chairman of the firm’s Enterprise Electronic Communications & Media Governance Committee, and leading BAML’s Global Banking & Markets Electronic Communications & Media Compliance team, among other responsibilities. Prior to BAML, Mr. Preston was Senior Special Counsel at NYSE Regulation. In his role at the NYSER, Mr. Preston helped develop and interpret various NYSE rules. He has worked on several major regulatory initiatives, including Regulation SHO, gifts and entertainment and electronic communications (NYSE 07-59), among others. Before joining NYSE, Mr. Preston was the General Counsel and Chief Compliance Officer (CCO) for Santander Investment, SA’s New York investment bank. He was also the CCO of the investment banking arm of the Bank of Nova Scotia, and Associate General Counsel for the Securities Industry Association (now SIFMA). Prior to SIFMA, he worked in private practice, representing financial services entities. Mr. Preston received his J.D. from Fordham University School of Law. He is a member of the Bar of New York, New Jersey, Washington, DC and the U.S. Supreme Court.

Joanne Rodgers is a Vice President of Compliance at New York Life Insurance Company (NYL).  She is responsible for managing the sales material review unit, field review unit and market surveillance. Ms. Rodgers has worked at NYL in various roles of compliance for the past 15 years. Prior to joining NYL, she worked as an examiner at NASD. She is a graduate of Franklin & Marshall College with a B.A. in Business Administration.

Joseph P. Savage is a Vice President in FINRA’s Investment Companies Regulation Department. Mr. Savage specializes in a broad range of securities regulatory matters, including investment management, investment company, advertising and broker-dealer issues, and regularly appears at conferences regarding these issues. Prior to joining FINRA, he was an Associate Counsel with the Investment Company Institute and an attorney with the law firms of Morrison & Foerster LLP and Hunton & Williams. Mr. Savage also served as a judicial law clerk for United States District Judge John P. Vukasin of the Northern District of California. Mr. Savage holds a bachelor’s degree from the University of Virginia, a master’s degree from the University of California, Berkeley, and a J.D. from the University of California, Hastings College of the Law, where he served as Note Editor of the Hastings Law Journal.

Futures Trading and Social Networking

With this week’s release of FINRA’s guidance on social media sites for securities traders, I thought it would be interesting to look at how the futures trading regulatory body is dealing with the issues. It turns out that the National Futures Association recently amended its rules to address social media and released new interpretive notices (.pdf).

As with FINRA, the NFA took a platform neutral position. On-line communications are subject to the same standards as other types of communications.

All audio or video advertisement, regardless of whether its on the radio, television, the internet or any media accessible by the public is subject to the rule. That means it must be reviewed by the NFA before it is published if it contains a specific trading recommendation or claims of past profits.

Any electronic content that can be viewed by the general public, or even by a more closed community that includes current and potential customers, can be promotional material. That makes it subject to the requirements of NFA Compliance Rules 2-29, 2-36, or 2-39.

Members should have policies regarding employee conduct. These policies could require employees to notify the employer if they participate in any on-line trading or financial communities and provide screen names so that the employer can monitor employees’ posts periodically. Alternatively, the policy could simply prohibit participation in such communities. The Member must, of course, take reasonable steps to enforce whatever policies it adopts.

The notice also points out that you need to be careful about your hyperlinks. You could be held accountable for linking to third party content that is misleading.

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FINRA Issues Guidance on Social Networking Sites

Securities firms and brokers have been looking for guidance on how they can use social networking sites. Actually most industries have been trying to figure out what they can and cannot do with these sites. The difference is that the FINRA limitations on communicating with the public make it very difficult to use the sites in compliance with the FINRA rules.

Yesterday, FINRA released Regulatory Notice 10-06 that “clarifies the responsibilities of firms to supervise the use of social networking sites to ensure that recommendations are suitable and their customers are not misled. The Notice also addresses the recordkeeping and other responsibilities of firms.”

The primary goal of FINRA is to protect investors. So this notice does not open the floodgates for using social network sites. They note that they are not even certain that adequate technology currently exists to meet the requirements in the notice. I’m sure vendors will take notice.

“The goal of this Notice is to ensure that—as the use of socialmedia sites increases over time—investors are protected from false or misleading claims and representations, and firms are able to effectively and appropriately supervise their associated persons’ participation in these sites.”

In developing the Regulatory Notice, FINRA worked with its Social Networking Task Force composed of compliance and other representatives of 14 firms.

The notice does not change FINRA policies or their positions.  But there are some useful clarifications. If you have used a blog, FaceBook, Twitter, or LinkedIn, the clarifications are fairly obvious. For example, a blog can be an advertisement or an interactive electronic forum. It just depends on whether you allow comments or interactivity.

FINRA has scheduled a webinar to address Regulatory Notice 10-06: Compliance Considerations for Social Networking Sites

Orignally, I heard some hints that there may be some new policies announced as part of FINRA’s March 17 webinar: Implementing Compliance Practices for Social Media. But now that description has been changed to mere address implementation of Regulatory Notice 10-06.

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Social Networking Compliance

Think Before You Tweet!

What are the challenges for broker/dealers and investment advisers trying to use social networking sites?

Complinet hosted a webinar on this topic with Clifford Kirsch from Sutherland Asbill & Brennan LLP and Debbie Corej, Vice President, Compliance – Insurance Division, Prudential.

Clifford started the discussion by pointing out the need to think about who is using these communication tools and what they are using them for. There is not a single source for the legal rules on how to use social networking tools in compliance with the regulatory requirements. You have to fit these tools into the established regulatory frameworks.

Broker/Dealer

With respect to the supervisory structure, you should look at FINRA Rule 3010. You need a policy, whether you allow use of these tools or not. You should start by looking at FINRA’s Guide to the Internet.

The next focus is whether the tools are being used as advertising and sales literature. If so, then there are content requirements, filing requirements and reviews. There is new proposed FINRA Rule 09-55 that would streamline the approach to advertising. There is no specific reference to social networking. Many commenters did request some specific discussion of social networking.

Then next hurdle is record-keeping. Some site are easy to integrate with record-keeping. SEC Rule 17A-4 has extensive requirements.

Another issue is keeping track of complaints and filing complaints. That is hard to do in the free flow of information on social networking sites. What do you do if someone complains on Twitter?

Investment Advisers

As with brokers you still need a supervisory structure and examinations for risk. You should have a policy, pro or con.

With advertising and sales literature, the requirements are not as difficult as broker/dealers. There are no filing or pre-approval requirements. SEC Rule 206(4)-1 prohibits testimonials and selective discussion of past performance.

There are record-keeping requirements, so you need a system in place for preserving the records, even though they are created on a third party social networking site.

Real Life with Social Networking at Prudential

Debbie turned to some of the challenges in her organization. They have a big umbrella. Part of the challenge is controlling the technology itself.

Prudential does block some sites and is looking at ways to open access in a way they can control. There are competing interests in the company. Recruiters have a different use than marketing. Everybody has some need to use the tools to stay connected with colleagues and experts.

There are some vendors out there trying to meet the compliance requirements. But they are all new and untested. FINRA is not giving any particular blessing on a tool.

It is important that compliance understand the different features of a site and the terms and conditions for that site. Any one social social networking site is likely to have features that fall into multiple categories for compliance requirements.

For example, you should prohibit the recommendations feature of LinkedIn. You should have an internal person as a connection so that they get a notice of updates to profiles.

You need to have people submit correspondence for record-keeping internally and then review the account to make sure all of the correspondence has been submitted.

It is important to have a policy. It is also important that the policy is not freestanding but integrated with other policies, such as confidentiality. It’s possible that if you do not prohibit a tool, you may be implicitly allowing the use of that tool.

Of course you need to test compliance with the policies. If you are banning, you should search the site for employees’ names and your company name.

FINRA Task Force

FINRA has created a task force to look at social networking. (Debbie is on the task force.) FINRA is very interested in the topic and how the mechanisms can work in compliance. At the company-level it is easier to control and monitor than at the individual registered-representative level.

There is the problem of using the sites in personal level is hard to contain. What if a friend asks you a professional question?

FINRA is hosting a March 17 webinar: Compliance Considerations for Social Networking Sites.

FINRA and Social Networking

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Wall Street bankers and analysts increasingly want to use social networking to connect and interact with customers. But financial services companies have a hard time trying to comply with the compliance and regulatory requirements.

Social networking sites such as Facebook, Twitter and LinkedIn provide new ways for financial service firms to connect, inform and interact with their customers. They also raise new compliance challenges. As currently designed these sites may not allow you to archive and maintain the communications on your own books and records.

Apparently FINRA understands this. At the Securities Industry and Financial Markets Association Annual Meeting on October 27, 2009, FINRA Chairman and CEO, Rick Ketchum announced that they had formed a Social Networking Task Force. The group is comprised of industry participants to explore how regulation can embrace technological advancements in ways that improve the flow of information between firms and their customers—without compromising investor protection.

So how does that explain the absence of social networking sites in the latest proposed changes to FINRA’s communications rules?

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