If you’re in the securities industry, you’re probably keenly attuned to recent regulatory guidance about determining who needs heightened supervision and designing a plan to provide that supervision. But are you making full use of an interactive social media web capture tool to expedite that process and improve your results?
Social media is fraught with potential dangers for firms, financial advisors, and other associated persons. It’s an easy place for things to go wrong, in terms of communications with the public and unauthorized advertising. But even on social media, the Financial Industry Regulatory Authority or FINRA “rules on communicating with the public are still applicable.” If you’re not diligently creating a web archive of all of your communications—including social media feeds—using a dynamic, interactive native-format collection method, chances are that you’re falling short of your requirements. What’s more, you might also be missing out on important clues for who should be subject to heightened supervision and how those under such increased scrutiny are doing.
This is the last post in a three-part series explaining how FINRA’s regulations demand the development of a robust web capture protocol—and how Hanzo can help. We’ve already introduced Regulatory Notice 17-18, Social Media and Digital Communications, and discussed the value of an interactive, dynamic web preservation method to ensure compliance with its specific provisions. Today, we’re diving into the more recent Regulatory Notice 18-15, Heightened Supervision, to discuss how online content—particularly social media content—can help firms both identify and supervise individuals with concerning histories.
A Brief History
Before we jump into Regulatory Notice 18-15, it’s worth reflecting on why we have any of these regulations in the first place. The market wasn’t the only thing that crashed in 1929; consumer trust in financial markets plummeted as well. Those who were able to pull through the Great Depression were extremely reticent to invest in the stock market that had so recently stripped them of their wealth. Congress enacted the Securities Act in 1933 and the Securities Exchange Act in 1934 in an effort to give potential investors renewed confidence in the securities market.
The Securities Exchange Commission (SEC) and, later, FINRA were established to enforce these laws, promoting market stability, protecting investors, and ensuring that securities were fairly traded and administered. The eventual tangle of laws, rules, and regulations governing the industry have at their core two principles: communications with potential investors must be honest, open, and transparent, and professionals involved with securities trading must treat all investors fairly and with integrity. Today, the SEC works to achieve that fairness for every individual investor, while FINRA, a self-regulatory organization, oversees and provides guidance to brokers, dealers, and firms.
This context underlies the daily business of regulatory compliance across the entire securities industry. It also underpins Regulatory Notice 18-15, which provides for heightened supervision of those associated persons whose previous behavior has not inspired the kind of confidence that this regulatory framework was created to ensure.
Regulatory Notice 18-15
On April 30, 2018, FINRA issued its Regulatory Notice 18-15, Heightened Supervision. This notice aims to limit the potential risks to investors caused by firms employing associated persons with a history of misconduct. It requires assessment of all associated persons, identification of those with behavior that raises concerns, and development of a plan for heightened supervision to protect investors.
The notice begins by reiterating that FINRA’s goal is to “maintain trust in the financial markets.” Toward that ultimate goal, “firms also have a key role to play in protecting investors from bad actors.” In that role, firms should ensure that their supervision is “appropriately tailored for each associated person.”
The first duty under Regulatory Notice 18-15 is to identify individuals in need of heightened supervision. These may be individuals who have been disciplined, who have been subject to customer complaints, or who have experienced “a pattern of unadjudicated matters” that raise reasonable concerns.
Next, firms must develop and implement a plan for heightened supervision of such concerning individuals. This plan—as with all supervisory plans—should be individualized to address the specific areas of concern raised by the associated person’s past misconduct. The notice spells out a host of provisions to provide that supervision, from additional training to frequent contact between the associated person and a trusted principal supervisor. However, Regulatory Notice 18-15 is quick to point out that it does not represent a safe harbor, nor are its lists of considerations or protective measures exhaustive.
The notice does not explicitly spell out the final requirement: extensive documentation of all identification efforts and supervisory measures. This is a classic “pics or it didn’t happen” situation: a firm must be able to prove that it retained and reviewed its records in search of concerning individuals and that it adequately intervened, or the firm itself may be “subject to disciplinary action for a failure to supervise.”
How Social Media Archives Can Aid in Compliance
Social media provides assistance in both the identification and the supervision of these individuals.
Supervising the social media history—dynamically preserved through a comprehensive web archival protocol—of associated persons can aid in identifying those who aren’t behaving appropriately. As we discussed in our two-part blog series about FINRA’s Regulatory Notice 17-18, regarding social media, there are numerous opportunities to intentionally or inadvertently miscommunicate online. Associated persons may have provided incomplete or misleading information through social media posts, comments, or dialogue or may have allowed and adopted testimonials through inaction or permissive settings. Native advertising without complete disclosure that it is advertising is another area in which social media content can easily be misused.
Nor does the usefulness of social media monitoring end after an individual has been identified as needing heightened supervision. All of the same communications and advertisements should be supervised for potential errors or misconduct.
It’s also worth noting that there are at least three potential targets that could be hit by the fallout of a concerning history and heightened supervision—and dynamic web preservation of online social media content addresses all three. First, there’s the obvious risk that FINRA is concerned with: the risk to individual investors who rely on an advisor who is unworthy of their trust. Second, though, is the risk to an unfairly accused associated person—someone who is good at his job but who has, through a short-term mistake or suspicious yet innocent circumstances, been labeled as a “risk.” Third, of course, there’s the risk to a firm that associates with an individual in need of such heightened supervision.
By rigorously collecting comprehensive, interactive web archives, firms can protect against all three vulnerabilities. First, of course, by combing through an associated person’s online communications and following through with adequate supervision, firms can protect investors. But those activities just as effectively prove the correct behavior of a good advisor who’s been dealt a bad hand. An established history of compliant, honest, trustworthy behavior, shored up by heightened supervision, can start to rebuild the bridges that were damaged by a prior “concerning” history. Finally—and perhaps most crucially to firms themselves, although left unsaid by FINRA—having a complete record of day-to-day online communications can satisfy the all-important CYA policy, allowing firms to prove that they did everything they could to protect investors.
Hanzo Can Help
Hanzo’s future-proof, fully interactive, native-format web preservation methods allow firms to capture—on their schedule—all of their online content, including social media. Our archives are dynamic and fully clickable, preserving links, comments, hidden content, videos, interactive disclosures, and more. Our content is strong enough to be used in court—so it will weather a regulatory investigation.
To live up to the expectations of the SEC, FINRA, and other regulators, firms need to effectively use all of the tools at their disposal both to protect investors from potential bad actors and, just as importantly, to protect themselves by providing the means they can use to prove that their actions have been in compliance with all applicable requirements.
This is where Hanzo’s dynamic web capture can help. If you’re ready to capture confidence, give us a call.