FINRA Regulatory Notice 11-39: Social Media Websites and Use of Personal Devices for Business Communications

Following its January 2010, Regulatory Notice 10-06, providing guidance on communications with the public through  social media sites, FINRA has issued Regulatory Notice 11-39 providing further clarification about application of  FINRA rules to new technologies.  The notice addressed a number of topics, including recordkeeping, supervision, third-party posts, third-party links and websites, and associated persons accessing social media sites from personal devices.

Recordkeeping
FINRA reminds members that their obligations to keep records of communications made through social media depend on whether the content of the communication constitutes a business communication. The SEC has stated that the content of an electronic communication determines whether it must be preserved. 

Supervision  

As part of its responsibility under NASD Rule 3010, a firm's registered principal must, prior to use,  review any social media site that an associated person intends to use for a business purpose.   FINRA has noted that a registered principal must review an associated person's proposed social media site in the form in which it will be “launched.”  Under NASD Rule 2210, unscripted participation in an interactive electronic forum comes within the definition of “public appearance.” 

To monitor these fora, FINRA recommends that firms adopt risk-based supervisory procedures utilizing post-use review, including sampling and lexicon-based search methodologies, of unscripted participation in an interactive electronic forum.   FINRA requires that any procedure that a firm adopts be reasonably designed to ensure that interactive electronic communications do not violate FINRA or SEC rules.  static posting is deemed an “advertisement” under NASD Rule 2210 and therefore requires a registered principal to approve the posting prior to use.

Links to Third-Party Sites
FINRA warns members that a firm may not establish a link to any third-party site that it knows or has reason to know contains false or misleading content.  FINRA concludes that a firm could be deemed to have become "entangled" with a third-party site if, for example, it participates in development of the content on the third-party site.

Data Feeds
The notice also addresses FINRA's requirement that firms adopt procedures to manage data feeds into their own websites.  FINRA is requiring that firms regularly review data feeds for red flags that indicate that the data may not be accurate, and take immediate steps to correct any inaccurate data.

Finally, in a "Q&A format, the notice provides additional guidance regarding, recordkeeping, supervision, third-party posts, third-party links and websites, and associated persons accessing social media sites from personal devices.  See more....

http://www.finra.org/Industry/Regulation/Notices/2011/P124186  

ENHANCING CCO EFFECTIVENESS: SEVEN THINGS CCOs SHOULD REMEMBER

As we mentioned in our July 25, 2011 post, prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the work they do.  Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO function that routinely appear in canned written compliance policies and procedures that they pass out to registered adviser personnel.  As a reminder, periodically, we’ll post rules CCOs should never forget.  We follow now with a third rule.

Rule Number Three: Communicate your role to your Boss(es)

To avoid the appearance that you are doing more than administering the compliance program, take the time to carefully define, in writing, your job responsibilities and take steps to ensure that person(s) who supervise you know them and understand the roles and limitations of the job.   Then, periodically, take the time to remind them again and again.  Were I to give a quiz to all of the managers who supervise CCOs, asking about the CCO role and what a CCO does, I venture, most of them (who have not served in that capacity or have no prior legal or compliance background) would, unfortunately, fail.  Even more unfortunate, is that they and other employees believe that you are somehow, by definition, responsible for the day-to-day oversight of others.  When you’re perceived as the person responsible for “signing-off” on the actions of others, you open yourself up for assuming supervisory responsibility, and thus liability, for those employees. 

The New Whistleblower Protection Rule

The SEC's new whistleblower program officially became effective on August 12, and the SEC has launched a new webpage for people to report a violation of the federal securities laws and apply for a financial award. 

Following enactment of Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Office of the Whistleblower was established by the SEC to administer its whistleblower program.  The SEC has appointed Sean McKessy as its head.  Under the program, the SEC may provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action in which over $1,000,000 in sanctions is ordered.  The webpage notes that the range for awards is between 10% and 30% of the money collected.  See More....
http://www.sec.gov/news/press/2011/2011-167.htm

Former Major League Player and Others Charged with Insider Trading

The SEC has charged former professional baseball player Doug DeCinces and three others with insider trading ahead of a company buyout.  DeCinces, a third baseman, played for fifteen seasons (1973 - 1987) in the major leagues for three different teams, including nine years with the Orioles and six years with the California Angels.  The SEC charged that DeCinces and his associates made more than $1.7 million in illegal profits when Abbott Park, Ill.-based Abbott Laboratories Inc. announced its plan to purchase Advanced Medical Optics Inc. through a tender offer.

DeCinces agreed to pay $2.5 million to settle the SEC’s charges, and the three others also agreed to settlements.

The SEC's complaint alleges that DeCinces received confidential information about the acquisition from a source at Santa Ana, Calif.-based Advanced Medical Optics.  He then began purchasing shares of Advanced Medical Optics in several brokerage accounts, buying more throughout the course of the impending transaction as he received updated information from his source.  During the period, DeCinces also illegally tipped three associates who traded on the confidential information – physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach.  See more....

http://www.sec.gov/litigation/litreleases/2011/lr22062.htm

Husband of Former Playboy CEO Charged with Insider Trading

The SEC's Chicago Office has filed a civil injunctive action in the U.S. District Court in Chicago against William A. Marovitz, the husband of former Playboy CEO Christie Hefner, charging him with illegal insider trading in Playboy stock in advance of public news announcements. See more....

http://www.sec.gov/litigation/litreleases/2011/lr22059.htm

SEC Report on Examination of Certain Structured Securities Products Sold to Investors

The Securities and Exchange Commission staff has issued a report summarizing the results of a sweep examination of the retail structured securities products business of 11 broker-dealers, covering a cross-section of the industry. The report identifies common weaknesses seen in sales of structured securities products and describes measures by broker-dealers to better protect retail investors from fraud and abusive sales practices.
The report can be viewed at http://www.sec.gov/news/studies/2011/ssp-study.pdf

ENHANCING CCO EFFECTIVENESS: SEVEN THINGS CCOs SHOULD REMEMBER

Prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the kind of work CCOs perform.  Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO functions, even though they routinely show up in canned written compliance policies and procedures that are passed out to adviser personnel.

As a reminder, periodically, we’ll post rules CCOs should never forget even as they comply with all the other rules that apply to investment advisers. We start with the first two below:       

Rule Number One: Your Job is to “Administer” the Compliance Program:  The CCO’s job function as mandated by Rule 206(4)-7 (the “rule”) is limited to“administering” the investment adviser’s compliance policies and procedures.  While the rule contains no explicit definition for what the term administering means, the rule makes one thing clear, it is the adviser who is legally required to “adopt and implement written policies and procedures reasonably designed to prevent violation” of the Investment Advisers Act of 1940.  What this means is that you are not the guarantor that your adviser will not experience a compliance failure.  Nor is it necessarily true, from a supervisory perspective, that you are responsible for the compliance failures of others in the firm.  To the contrary, the failure of a compliance program to find and remedy compliance problems can just as easily be viewed as evidence that the adviser’s compliance program, including its policies and procedures, are not effective.

This doesn’t mean that compliance personnel of an adviser can’t be sanctioned for not properly supervising employees.  Of course, they can be and are sanctioned.  However, the fact that you are a CCO does not, in and of itself, give you supervisory responsibility over your adviser’s personnel.  In short, if you’re not supervising other advisory personnel, and you limit supervisory responsibility to persons who are part of the compliance staff, the Adopting Release to the rule makes clear that you aren’t necessarily liable for the supervisory lapses of your adviser.  This leads to our second rule.       

Rule Number Two: Consider avoiding taking on roles that give the appearance that you supervise personnel outside of administering the compliance function:  Such advice may be particularly hard to follow with smaller advisers or in other instances where the adviser’s overall management structure is fairly narrow (e.g. the president and CCO are one and the same).  However, for most others, taking on management responsibilities outside the compliance program can be a recipe for trouble.  One such problem is that it places you in a supervisory role, when the very title of chief compliance officer does not carry with it supervisory responsibility.  The SEC made this clear when it adopted the rule.  In short, if you do supervise others outside the compliance staff, remember using, among other rules and Investment Advisers Act §203(f), the SEC has brought cases showing you can be sanctioned for not properly supervising investment adviser representatives and others.