The proliferation of digital communication has, to say the least, presented new challenges for financial advisors seeking to grow their businesses while staying within the good graces of regulators. It has also presented challenges for those same regulators who must apply mandates from items like the BOOKS AND RECORDS RULE to communication vehicles that were not even dreamed about when the 1934 Securities Exchange Act was written.
But the SEC seems to be paying a lot of attention to the new communication landscape and in recent years has issued guidance on topics like THE TESTIMONIAL RULE AND SOCIAL MEDIA . The SEC Office of Compliance Inspections and Examinations (OCIE) issued a “RISK ALERT” IN DECEMBER 2018 in order to “remind advisers of their obligations when their personnel use electronic messaging and to help advisers improve their systems, policies, and procedures by sharing the staff’s observations from these examinations.” Here is a high-level summary of that guidance with links to additional resources.
Reduce Risk: Test and Monitor Your Policy
The premise prompting the alert is that RIAs are using electronic messaging more frequently, which presents challenges for complying with certain provisions of the INVESTMENT ADVISERS ACT OF 1940. LinkedIn, for example, did not come into being until 2002. Facebook launched in 2004.
The primary take-away from the alert is that financial advisors need to review their communications policies and monitor activities to make sure they are being implemented and that they are compliant. Apparently a limited-scope review of RIAs showed room for improvement in that area. Recommended improvements include requiring employee testing to ensure they are aware and follow your firm’s policies, control over the devices used for business purposes, and recommendations for supervisory review of the electronic communications your firm permits. The OCIE offered several examples of practices to assist financial advisors in developing policies, while noting the suggestions are “not intended to be a comprehensive list of practices for a firm to meet its regulatory obligations”.
- Monitor the social media posts, emails, or websites
- Archive such business communications to ensure compliance with record retention rules
- Ensure the capability to identify any changes to content and compare postings to a lexicon of key words
- Regularly reviewing popular social media sites to identify if employees are using the media in a way not permitted by the adviser’s policies.
- Such policies included prohibitions on using personal social media for business purposes or using it outside of the vendor services the adviser uses for monitoring and record retention.
Digital Communication is Here to Stay
The “Risk Alert” is well-worth reviewing in detail, as some industry watchers believe digital communication practices will be a point of emphasis for SEC regulators going forward.
It’s important to note that this Risk Alert is geared strictly to investment advisor representatives. FINRA and broker-dealer Representatives have an even higher threshold in some instances to comply with the rules around communications with the public.
The reality is that digital communication is here to stay. Clients certainly expect financial advisory firms to stay current with these trends. Cutter & Company (an independent Broker-dealer and Registered Investment Advisor) uses DocuSign electronic signature technology and will soon allow text messaging for those that subscribe to the firm’s approved service provider. Independent financial advisors working with our firm can rest assured that digital communications systems and practices are implemented with a firm eye toward the SEC’s “Risk Alert” key take-away. “OCIE encourages advisers to review their risks, practices, policies, and procedures regarding electronic messaging and to consider any improvements to their compliance programs that would help them comply with their regulatory requirements”.