A Deeper Look at Social Media Compliance. Utilizing Social Media in the Financial Services Industry A Quest CE Case Study

Transcription

1 A Deeper Look at Social Media Compliance Utilizing A Quest CE Case Study

2 On June 5, 2012, Quest CE began conducting a nationwide survey on social media involvement in the financial services industry. The purpose of the study was to discover how and why registered representatives were utilizing social media for their businesses. Utilizing Social Media in the Financial Services Industry 1

3 EXECUTIVE SUMMARY As social media continues to revolutionize the way professionals conduct business, financial advisers and registered representatives have been presented with a new medium to reach out to their clientele, gain business relationships, and stay connected with the latest industry trends. However, with opportunity comes responsibility, as regulators have, and continue to, police the rules governing these interactions to ensure investors remain protected. As a result, firms have been called to action; comply with social media regulation or run the risk of a detrimental audit. The need for firms to implement a social media policy into their compliance manual is rapidly accelerating. In order to provide ongoing direction to the financial services industry, the SEC and FINRA have implemented rules to govern electronic communications with the public. In 2008, the SEC decided to acknowledge company websites and other electronic forums as legitimate sources for registered investment advisors to meet public disclosure requirements under Regulation Fair Disclosure. Therefore stating that utilizing internet technology to communicate with clients, prospects and the industry is an acceptable business practice. Two years later, in 2010, FINRA released Notice 10-06, an important regulatory guide on social media compliance. Then in 2011, FINRA provided more clarity on the application of rules governing social media communications with the public through Notice Today, some of the largest broker dealers in the world have joined the social media bandwagon. Facebook, LinkedIn and Twitter have become the driving force behind a strong social platform and successful business. Although such an online presence is beneficial to the company and individual, in recent years the line between having a business and personal voice has been blurred. 2

4 KEY STATISTICAL FINDINGS 73% of financial professionals believe that social media is beneficial to their business. Over 50% of respondents who reported not using social media as a business tool were still using it on a personal level. 3

5 Why Don t You Use Social Media As A Business Resource? 21 % 50 % 56 % Does Your Firm Have A Social Media Archiving System In Place? If You Use Social Media For Business, How Do You Utilize It? 21 % 79 % 50 Compliance Risk 25 Archives Social Media Use Secure New Clients Note: Firms who do not archive their social media are exposed to fees, penalties or risk possible expulsion. Connect with Current Clients Gain Business Awareness Promote their Firms Services 4

6 Ignoring social media compliance is a gamble, and can leave your firm exposed to fees, penalties or even expelled from FINRA membership. If your firm insists on not allowing social media use, they are still responsible for verifying that their representatives are adhering to the ban. Are you tracking all areas of social media? Personal versus Business Electronic Communications Simply disallowing social media does not mean that firms can cut ties with social media responsibility. Regardless of whether you block/disallow social media activity at the firm, representatives can still access sites through personal devices and can still communicate, business as such, through their personal accounts. Through existing technologies, firms can implement an archival and tracking system that ensures your firm is capturing all content and remaining FINRA compliant. Based on the results of our survey: 44% of registered representatives reported using social media as a business resource and 69% of respondents reported utilizing social media for their own personal use. Do You Use Social Media for Business or Personal Use? 44 % 69 % Use Social Media as a Business Resource Use Social Media for Personal Use 5

7 Of the 56% of respondents who said they did not use social media as a business resource, 57% said they were still using it on a personal level. On top of that, of the respondents using social media as a business resource, only 21% reported that their firm had a social media archiving system in place, with 79% of respondents reporting that either their firm didn t have a system in place, or they didn t know if there was a policy in place.* Does Your Firm Have A Social Media Archiving System In Place? 21 % Compliance Risk 79 % * This is a surprising number considering FINRA states under Regulatory Rule 11-39, in affiliation with Rule 17a-4(b)(4), if the communications being conducted through social media relate to, business as such, originals received, and copies of all communications sent, must be retained to remain FINRA compliant. As stated in FINRA s Regulatory Notice (Social Media Websites and the Use of Personal Devices for Business Communication), Firms may permit their associated persons to use any personal communication device, whether it is owned by the associated person or the firm, for business communications. Of course, the firm must be able to retain, retrieve, and supervise business communications regardless of whether they are conducted from a device owned by the firm or by the associated person. Also, in accordance with SEC Rule 17a-4(b), under the Securities Exchange Act of 1934 (SEA) and NASD 3110 every firm that intends to communicate, or permits its associated persons to communicate, through social media sites must first ensure that it can retain records of those communications that relate to its business as such. The key takeaway being that firms must monitor social media regardless of the forum, and they must retain records of any communication as it relates to, business as such. Due Diligence Archives Social Media Use Due diligence is the act of investigating or evaluating a business opportunity/contract. The term due diligence describes a general duty to exercise care in any transaction. As such, it is important for firms to do their homework before committing themselves to one solution. Prohibiting social media is not an option considering you don t have any way to complete due diligence on your policy to demonstrate to FINRA that you are testing your process. 6

8 By utilizing social media, representatives can create additional opportunities to reach out to clientele, connect with coworkers, and discover industry trends. In addition, firms that implement a social media policy will be well-positioned to successfully manage their business risk. Involvement with Social Media What are the benefits of social media? How Often Do You Use Social Media? Social media is becoming an indispensable part of the marketing mix for many businesses and one of the best ways to reach current and potential clients. In growing numbers, registered investment advisors are using social media to promote services, educate investors and recruit new employees. Social media, such as Facebook, Twitter and LinkedIn, have transformed the realm of business, using web-based and mobile technologies to reach the masses in a matter of seconds, instantly streaming communications into an interactive dialogue. In today s digital age, customers are approaching financial service providers from the information they collect online. 27% Weekly 40% Daily 11% Montly 22% Never 7

9 Based on the results of our survey: When asked how often respondents use social media, 40% said daily, 27% said weekly, 11% said monthly, and 22% said never. Which Social Media Sites Do You Use? 73% of survey respondents agreed that social media is a beneficial resource to their business practice. When representatives were asked which social media sites they use, 57% said LinkedIn, 57% said Facebook, 24% said Twitter, 13% said Blogs, 23% said they didn t use social media, and 4% said other(google + and MySpace). 14% Twitter 32% LinkedIn 32% Facebook 2% Blogs 13% I Don t Use Social Media 7% Other 8

10 Based on the results of our survey: Of the 44% of respondents who reported using social media as a business resource, 46% said they use it to secure new clients, 56% said they use it to connect with current clients, 59% said they use it to gain awareness of their firm, and 64% said they use social media to promote their firm s services. If You Use Social Media For Business, How Do You Utilize it? Secure New Clients Connect with Current Clients Gain Business Awareness Promote their Firms Services 9

11 A huge misconception that many firms hold true is that if they disallow social media, their firm is remaining compliant. This is not only a false assumption; it puts businesses that are not using social media at a huge competitive disadvantage. Misconceptions Surrounding Social Media Compliance My Firm Disallows Social Media, Now What? I don t use social media as a business resource because... Of the 56% of respondents who said they did not use social media as a business resource, 21% said it was because they didn t know how to use social media and 50% said it was because their firm didn t allow it. With almost a quarter of respondents unaware of how to use social media, and another 50% banned from using it, a large number of representatives are missing out on the advantages of social networking. Properly training employees on how to use social media is one of those important factors that can help a business grow socially and increase sales. Consumers, now more than ever, are using social media to gain information, ask questions, receive feedback, and stay connected. 21 % 50 % 56 %

12 A Competitive Disadvantage From a compliance standpoint, FINRA permits the use of social media as long as it is employed responsibly. Therefore, by disallowing social media, firms are putting themselves at a huge disadvantage by isolating such a large percent of the population. As described by Wall Street Journal columnist Josh Brown, We re all talking about this {social media} like its optional, it s not. If you re a financial advisor and you meet a Gen Y guy at a party, a 30 year old who s making some real money, and he goes to look you up on Google and doesn t find you, to him you don t exist. (1a) Do My Social Media Posts Require Pre-Approval? Many financial firms believe that their representatives social media communications must be pre-approved through their compliance department before being published. This, however, is a common misconception. In reference to Regulatory Rule (Communications with the Public), exceptions to the principle pre-use approval requirements for retail communications include, any retail communication that is posted on an online interactive electronic forum. More specifically, Rule 2210(b)(1)(A) exempts three categories of retail communications, provided that the firm supervises and reviews the communications in the same manner as required for supervising and reviewing correspondence pursuant to NASD Rule 3010(d). Therefore stating, that social media communications do not require pre-approval, however, the archival of all published content is still critical to remaining compliant. This is beneficial to firms because it allows them to take advantage of all that social media has to offer. A pre-approval solution is not only unnecessary, it s both costly and time consuming. By the time it takes a message to trickle down the hierarchy of a compliance department, the content may be dated or irrelevant. Data Sources (1a) Hordt,R. (June 17,2012) For this adviser, the blog s the thing. InvestmentNews 11

13 The question that financial executives continue to ask themselves is, Is social media really beneficial to my business? Based on the results of our survey, 73% of respondents agree that social media is beneficial to their business practice and bottom lines. Testimonials Provided are direct quotes from registered representatives describing why they believe social media is beneficial to their business: It creates awareness with my current customers and potential customers on the different products I have to offer. Social media keeps me in front of clients AND prospects so my name and services can be top of mind. Modern way to communicate. Personalizes me. I believe it can be a great equalizer for firms such as ours, in that we do not have a multi-million dollar advertising and marketing budgets. Word of mouth (or social media) advertising is free, and people tend to trust the likes of their friends. Opportunity to connect with colleagues, secure new business, introduces new services and ideas. My firm uses it to promote/enhance customer relationships. Reaches many customers/clients at one time, educational and fun at the same time. It is where the clients are now. Business needs to react to client need and preference. 12

14 If respondents answered that social media is non-beneficial to their business, in a few words they were asked to describe why. Provided are direct quotes from survey takers: People are already too bombarded with advertising. My client base is usually not computer savvy. Concerned about security of information. All it does is create customer service nightmares. 13

15 Your firm s supervision of social media is necessary in addressing potential issues that can arise when communicating across differing platforms. The SEC/ FINRA have made social media an important topic recently, and continue to enforce proper practice. Compliance Repercussions SEC Charges Illinois-Based Adviser in Social Media Scam On January 4, 2012, the disciplinary authorities charged an Illinois-based investment adviser with using LinkedIn and other social media networking websites to lure investors by offering more than $500 billion in fake securities. Though the advisor was apparently acting alone, the practice of using social media (like LinkedIn) for fraud is on the rise. The SEC released two investor alerts January 4, 2012, warning advisors about fraudulence when using social media such as LinkedIn and Twitter to create buzz and drum up business. Through these alerts, the SEC recommended that firms revisit their social media compliance standards. Registered Representative Suspended for Unbalanced Tweets In 2011, FINRA took disciplinary action against a representative that included a $10,000 fine and a full year suspension from any association with any FINRA Broker-Dealer. Additionally, the Broker-Dealer was fined $50,000 for failure to properly supervise their representatives activities. The representative maintained a Twitter account with more than 1,400 followers, and posted 372 tweets, 32 of which were related to one specific stock. FINRA determined that the rep s Tweets were unbalanced, overwhelmingly positive and frequently predicted a price rise, and the representative did not disclose that they and their family members held a substantial position in the stock. 14

16 FINRA s Activity According to the Annual Sutherland FINRA Sanctions Survey, in 2011 FINRA reported a significant increase in the number of disciplinary actions filed and the total fines imposed. FINRA reported filling 1,488 disciplinary actions in 2011, with the number of individuals barred by FINRA also increasing significantly from 288 in 2010 to 329 in The rate of growth in fines in 2011 also surpassed the rate of growth in the number of actions, with fines rising 51% to $68 million from 2010 s $45 million. The survey also identified the top enforcement issues for FINRA in 2011, as well as emerging trends for the future. The top enforcement issue in 2011 was advertising, jumping from $4.75 million in fines in 2011 to $21.1 million in 2012(1b). In August, a midyear review found that if fines continue on pace with the first two quarters, fines assessed by FINRA in 2012 will represent a 15% increase from 2011(1c). Data Sources (1b) Waddell, RI (August 10, 2012). FINRA 2012 Fines to Significantly Outpace 2011: Sutherland. AdvisorOne. (1c) Rubin, L.B. McCormick, M. A & Heilzer, G.D. (March 12, 2012). Annual Sutherland FINRA Sactions Survey Shows a 51% Jump in Fines in

17 The emergence of social media as a business channel for financial service professionals has required regulatory entities to provide standards, regulation, and guidance to protect investors and uphold the business integrity of industry professionals and firms. Social Media Rules and Regulation Regulatory Notice Effective February 4, 2012, the SEC will adopt FINRA s proposed rule change, which will replace the current NASD Rules 2210 and 2211, Interpretive Materials and , and certain provisions of Incorporated NYSE Rule 472. These rules are collectively referred to as the Communication Rules and govern all FINRA member firms communications with the public, which includes all electronic communications. Included in the changes are a reduced number of communication categories from six down to three: retail communication, institutional communication and correspondence. Retail Communication: Any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. Institutional Communication: Any written (including electronic) communication that is distributed or made available only to institutional investors, but does not include a member s internal communications. Correspondence: Any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Communications that currently qualify as advertisements and sales literature generally fall under the definition of retail communication. FINRA Rule 2210(b) (1)(A) requires an appropriately qualified registered principal of the firm to approve each retail communication before the earlier of its use or filing with FINRA. However, there are three exceptions noted in Regulatory Notice that are exempt from the preapproval process with the expectation that the firm supervises and reviews the communications in the same manner as required for reviewing correspondence. This includes, any retail communication that is posted on an online interactive electronic forum. Therefore stating, that any electronic communication posted on an interactive electronic forum (social media) must be reviewed and monitored proactively, however, does not require pre-approval. 16

18 National Examination Risk Alert/ SEC Takes Action on Social Media Compliance In January 2012, the SEC clarified its stance on social media by issuing a National Examination Risk Alert after taking action to punish a financial advisor in Illinois, whom the SEC alleges committed fraud through postings on LinkedIn. The risk alert highlighted observations related to the use of social media by registered investment advisers. The alert warned the public that, While many RIAs are eager to leverage social media to market and communicate with existing clients, and to promote general visibility, RIAs should ensure that they are in compliance with all of the regulatory requirements and be aware of the risks associated with using various forms of social media. Regulatory Notice 10-06, Regulatory Notice and Rules 17a-3 and 17a-4 Various rules issued by the Financial Industry Regulatory Authority (FINRA) require supervision of communications by registered representatives. For instance, FINRA Regulatory Notice states that, Every firm that intends to communicate, or permit its associated persons to communicate, through social media sites must first ensure that it can retain records of those communications as required by Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 and NASD Rule FINRA also issued Regulatory Notice (Social Media Websites and the Use of Personal Devices for Business Communications) in August 2011 to addresses questions raised by firms that are affected by FINRA clarified that the device is not relevant; it is the content of the communication that must be considered. Simply disallowing social media is not an option. Associated persons may still use personal communication devices and other equipment to access business applications and perform business activities. It is important to note that firms are responsible for monitoring and reviewing communications regardless of the device it is being accessed through. 17

19 The key to implementing a successful social media policy is in the ability to archive, track, and monitor your representatives activity. With the growing use of social media, there have been a number of technology solutions that firms can use to accomplish compliance. How Can My Firm Achieve Compliance? Application-Based Technology An application-based solution is no more complicated then downloading the most recent app on your iphone. Installing at the application level allows your firm to seamlessly integrate your representatives social media archival designation directly into their journaling address. Once the representative has individually downloaded/installed the application, all interactions will be tracked and archived through the firms preexisting server. Thereafter, Compliance Officers can monitor the results and generate reports based of the firms pre-established lexicon searches. Browser-Based Technology Browser-based technology integrates directly into an office computer, allowing the firm to track, archive and monitor its representative s interactions. Once the solution is installed, communications will be sent directly to the company s current archiving address. A major obstacle presented to firms utilizing browser-based technology is the inability to track devices that do not have the browser-based solution installed. This inability poses a compliance loophole for representatives who may access social media sites through a mobile device or tablet. 18

20 We believe that our research highlights both opportunities and challenges for the industry. It is time that every firm fully embraces social media by implementing complete compliance policies, technology, and education. Final Remarks Conclusion The benefits of social media use can be seen in an advisor s potential to expand revenue and acquire new clientele. However, at times, the use of social media can act as a double edged sword, as it remains one of the most heavily regulated compliance issues, being the number one reason why firms limit or completely ban social media use for business purposes. Negligence does not assure innocence, and firms must be prepared for FINRA s visit by enacting a social media compliance solution that covers their FINRA provided responsibility. Methodology In the final results of Quest CE s survey, there were 101 participants. The survey consisted of 15 questions and it was a prerequisite that respondents be financial professionals in the financial services industry. When asked, What age range do you fall under, 11% said 20-35, 23% said 36-45, 36% said 46-55, and 30% said 50 and above. When asked, How many clients do you work with, 25% said 1-50, 17% said , 14% said , and 43% said 150 plus. The participants were recruited via . The type of method employed in this study was survey research. The survey was conducted from June 5, 2012 through July 31,

21 Methodology Graphical Data Age Range How Many Clients Do You Have? 11% % % % 56 and above 20