Getting the Message Right: Advertising Compliance for Broker-Dealers
For many broker-dealers, advertising review and compliance has become one of the thorniest possible challenges in the entire portfolio of regulatory and compliance responsibilities...
The Current Situation
For many broker-dealers, advertising review and compliance has become one of the thorniest possible challenges in the entire portfolio of regulatory and compliance responsibilities. There are multiple reasons for this, the main one being the proliferation of social networking sites. Utilization of these sites generally falls under either advertising or public appearances. For many firms, the rules governing acceptable advertising and public communications can seem complex, cumbersome and often vague, with multiple regulatory agencies overseeing efforts. Required disclosures often appear lengthy and dry, and can take up valuable real estate seemingly better served with “real” message content. As well, the number of communication options for registered representatives is rapidly growing, presenting a host of new issues for firms in becoming and staying compliant.
Of course, the fact that a particular compliance mandate is challenging hardly holds water during a regulatory exam or in the face of potential fines. Nowhere is this reality proven truer than in a review of recent enforcement actions undertaken by regulators such as FINRA. From providing invitations to seminars that falsified information to advertising materials with misleading statements, Web sites with incomplete disclosures and beyond, a number of firms in recent months and years have been censured and fined for failing to adequately monitor, review and maintain appropriate records when it comes to advertising and public communications. (See Table 1).
By its nature, advertising is meant to sway or influence consumers and, as such, often pushes the edge of what’s considered acceptable in an attempt to gain new business. Further, describing financial products and services requires intricate explanations of complex items that can have a profound impact on the purchasers. Taken together, these factors and more represent a significant risk to broker-dealer firms.
In order to minimize this risk, and avoid the potential for negative publicity, fines or worse, firms must develop and implement a comprehensive system that effectively enforces company policies, documents and archives every request and approval and prepares for a potential exam by keeping the firm compliant, now and in the future.
The Medium Is the Message
To start, firms must understand the necessary scope of compliance and the role governing bodies play in determining what can be included in an advertisement and how it can be used, as well as understand the ever-expanding definition of “advertising.” FINRA has detailed rules that address broker-dealers’ communications with the public that specifically mandate communications be based on principles of fair dealing and good faith and to be fair and balanced. For example, among other requirements, FINRA rules state communications must include material facts and qualifications, must not exaggerate or include false or misleading statements, and must not predict or project performance or make exaggerated or unwarranted claims.
An advertisement (traditional as well as social networking) is defined as material other than independently prepared reprint and institutional sales material, that is published or used in any electronic or other public media, such as Web sites, newspapers, magazines, radio, television, billboards and a range of other delivery methods.
An area of particular focus, of course, is the realm of sales literature. Any written or electronic communication (other than an advertisement, independently prepared reprint, institutional sales material and correspondence) generally distributed or made available to customers or the public falls into this category, and is regularly the focus of much scrutiny. Here, items such as circulars, research reports, performance reports or summaries, form letters, telemarketing scripts, seminar texts, or excepts of any other advertisement, sales literature or published article, and press releases concerning a member’s products or services come into play, and must meet the standards set in governing appropriate content and intent. Public appearances also includes participation in chat rooms and other online activities.
These categories, while seemingly straight forward, quickly become blurred when trying to evaluate real-world examples. And, as each category has its own rules, effective policies, procedures and workflow are critical to avoiding regulatory deficiencies.
The Challenges of Complexity
If FINRA finds that a firm is not meeting the best practice standards or review and filing protocols, the regulator can require that a firm file all materials 10 days prior to use, which can place a significant burden on a firms operations, or, worse, initiate enforcement proceedings that may result in a fine and other disciplinary actions. And there’s little doubt FINRA is paying close attention. In 2008 alone, for example, FINRA reviewed more than 99,000 communications, via spot checks, and completed 476 investigations involving 2,378 separate communications.1
While FINRA gives clear direction in some of its written rules, how those rules apply to real-world situations is less clear. Limited guidance on a practical application of the rules adds an additional layer of complexity that many firms find challenging. For example, when offering something as concrete as a calculated performance number, many questions can arise that need to be considered when presenting the information. Are there extenuating circumstances? Are the underlying assumptions correct? Could something change between when the content is created to when it goes public? More importantly, in comparing two separate investments, care must be taken to disclose all material differences between them, including fees and expenses, liquidity, tax features and the like.
How a firm handles its advertising review workflow can also have a substantial bearing on how it becomes and stays in compliance. Controlling the security of an approved document, for example, can be critical to ensuring content is not cut up, pasted and forwarded. Questions about filing documents with FINRA come into play, as filing may create headaches and delays, but can prove valuable in the event of a regulatory exam.
The Right Tool for Maximum Compliance
As compliance requirements increase in quantity and complexity, implementing an enforced set of procedures reduces the risk, frustration and cost associated with advertising and public communications review. While smaller firms may be able to get by with spreadsheets and e-mails to manage the advertising review process, larger and more geographically dispersed firms face a daunting supervisory and recordkeeping burden to ensure compliance. These firms risk losing critical information or falling out of compliance due to an inconsistent mix of e-mails, faxes, spreadsheets or random documents that make up their ad review process, as well as seeing an ineffective process hold reps back from doing their job.
An effective advertising review process is built around the documents and activities that need approval. What’s needed, then, is a secure, online platform for the review, annotation and electronic recordkeeping of advertising and marketing pieces. That means the most successful firms should employ technology to support an operational workflow process with embedded compliance guidelines and automatic recordkeeping.
These systems, either home grown or available from compliance technology vendors, provide a mechanism for representatives to submit advertisements and other communications for review by an appropriate firm principal, facilitate the decision to file with FINRA, record all aspects of a firm’s advertising review process, enable status reporting for submitters, supply the firm’s reps with a pre-approved library of documents and much more.
A Necessary Choice
Given today’s rapidly changing regulatory and compliance landscape, firms must develop and implement an effective communications and advertising compliance review program to minimize the risk of falling out of compliance. To do this, firms need to engage in a comprehensive effort to achieve a high level of organization for all communication materials within the entire company.
Whether firms choose to seek advice from a compliance partner for developing a communications and advertising review program, build a home grown technology solution or purchase a technology solution, properly designed and implemented advertising review systems are invaluable resources to support internal audits or regulatory examinations. By choosing to demonstrate a firm-wide commitment to advertising review and adherence to written supervisory policies and procedures firms stand a better chance of remaining compliant.
Table 1: Selected Enforcement Actions, First Half 2011