It came as no surprise that FINRA’s 2022 Examination and Risk Monitoring Program Report highlighted communications with the public as a continued area of focus. The primary theme across this focus area relates to the sufficiency of internal processes, procedures, and controls. As FINRA has done with other areas, the broker-dealer regulator laid out various related regulatory obligations and considerations for firms as well as effective communications practices (both “dos” and “don’ts”) extracted from exam findings. We highlight a handful on which firms should focus.
New Focus Areas:
- FINRA chose to spotlight mobile applications for the first time, including by encouraging effective practices such as confirming the accuracy of data displayed to customers and that information about the apps’ tools and features complies with FINRA’s communications rules and other relevant rules before being posted (including with respect to Regulation Best Interest if information provided constitutes a recommendation).
- Municipal securities advertisements also made the list this year. FINRA highlighted (a) obtaining prior approval of advertisements by a qualified principal, including to confirm compliance with the content standards of Rule 2210 and MSRB Rule G-21; (b) educating and training firm personnel on applicable FINRA and MSRB rules and firm policies; (c) prominently describing the risks associated with municipal securities (including credit risk, market risk, and interest rate risk) to balance statements concerning their benefits (e.g., no “false and misleading statements or claims about safety, unqualified or unwarranted claims regarding the expertise of the firm, or promissory statements and claims regarding portfolio growth”); and (d) confirming that the potential benefits of tax features are correct and not overstated.
Not New, But Certainly Still Top-Of-Mind:
- Digital asset activity made the list again this year. FINRA notes that effective and compliant communications about these products (a) explain with prominence the risks that are essential to balance any related statements or claims about their benefits (e.g., “investments are speculative, involve a high degree of risk, are generally illiquid, may have no value, have limited regulatory certainty, are subject to potential market manipulation risks and may expose investors to loss of principal”); (b) do not overstate the possible benefits of digital assets or embellish the status of digital asset projects or platforms, whether current or future; (c) distinguish broker-dealer products and services from those offered by affiliated digital asset businesses (or from third parties); and (d) prominently identify entities responsible for non-securities digital assets business, and their service offerings should be accompanied by a description that indicates that services are not made available by the broker-dealer and do not have the same regulatory protections as securities.
- Digital communication channels like social media continue to draw FINRA’s attention. FINRA highlighted the need for tailored procedures for supervising digital communication channels, tools, and features, including: (a) establishing permitted and proscribed digital communications channels and implementing mechanisms to block proscribed channels, such as those that would hinder compliance with recordkeeping requirements; (b) monitoring channels, apps, and features offered to associated persons and customers (e.g., red flags that may indicate a registered representative is communicating through unapproved communication channels); (c) WSPs and controls for live-streamed public appearances, scripted presentations, or video blogs; (d) mandatory training and guidance for use of firm-approved digital channels and each component feature as well as expectations for business and personal digital communications; and (e) employing internal disciplinary actions for registered representatives who do not comply with policies (e.g., temporary suspensions or permanent blocks from channels or features and requiring additional training).
- Cash management account communications also reappeared on the list this year. This is unsurprising, especially with the rise of “yield” products offered by or through various institutions and bolt-on banking features (including check-writing) many firms make available to their brokerage customers via affiliated or third party banks. FINRA highlighted the importance of confirming business processes in this area and that supervisory systems and compliance programs are adequate. FINRA encouraged firms to plainly communicate the terms of these accounts, disclose that deposits are not cash balances held by the firm (i.e., they are obligations of the destination bank), and not include misleading statements or claims that state or imply the broker- dealer is a bank or that fail to balance promotional claims with the risks of participation.
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