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Two: The Regulatory Environment

What Are the Top Challenges Compliance Officers Face?

"Oh no! New technology is on hand that is destined to change the way my financial advisory practice does business! I'm the chief compliance officer, and the buck slops with me – how am I going to get my arms around this in a way that ensures I don't run afoul of dreaded regulators?”

If you're a chief compliance officer (CCO) who's reading this book, you may have had that very conversation with yourself – perhaps 20 years ago. Yes, when e-mail first arrived on the scene, many advisors fretted that this new way of doing business would carry regulatory pitfalls that could lead to their undoing. It's natural to fear the unknown, and advisors are loath to serve as test cases for oversight agencies that are getting their arms around the implications of technology. Yet ask yourself this question: When was the last time an advisor stumbled seriously during a regulator's audit over an e-mail issue?

“Plus ca change, plus e'est la тётe chose," as the French put it – the more things change, the more they remain the same. CCOs who are concerned that the emerging universe of social media could trip up their practices should consider that advisors have been down this road before, and the results weren't disastrous. Indeed, the basic rules that govern compliance – rules that exist to protect investors from harm – do not represent a sea change from the principles that have steered advisors for decades, as we shall see.


If you manage compliance, know this – your advisors are using social media. Be sure of it. Their clients are on sites such as Facebook and Twitter, and it only stands to reason that this reality is driving advisors down the same path, even if it's just posting a brief bio on LinkedIn. Indeed, many financial practice employees have access to multiple social media venues, and may be using personal accounts. That can lead to problems for the compliance environment, since CCOs need to be vigilant about their advisors' and other employees' behavior.

So what kinds of things do you, as CCO, need to think about?

CCOs should consider evaluating both the likelihood and impact of various risk scenarios, such as the ones outlined below by Financial Social Media, a digital marketing firm for financial services companies:

■ Reputation and Brand

■ Negative reviews or comments

■ Negative posts, including sharing negative press

■ Brand inconsistency

■ Viral negative sentiment

■ Regulatory and Compliance

■ Violation of advertising or e-communications regulations

■ Failure to archive

■ Legal and Privacy

■ Leaks of confidential information

■ Unauthorized use of copyright works

■ HR employee rights issues

■ HR hiring issues

■ E-discovery issues

■ Operational

■ Decrease in employee productivity

■ Cybersecurity risks/Technology system security breaches

The good news is, the rules haven't changed dramatically. To this day, the major body of compliance rules continues to come from the Investment Advisers Act of 1940[1]. Most of its rules are designed around the use of U.S. mail and telephones, although they did expand this a bit to include “any means or instrumentality of interstate commerce, directly or indirectly.”

The rules are pretty clear about what advisors can say, how they can say it, and what records must be kept. With the traditional means of mail and telephone everyone became used to the protocols, and they continue to this day.

Now along comes social media. It presents some new challenges, particularly for compliance to advertising, recommendation, and recordkeeping rules. If you “like” someone's post about an investment, is that a recommendation? If you post or tweet a news item, how do you keep a record of that?

In early 2012, the SEC made its first formal attempt to clarify social media responsibility for investment advisors. (See this four-page Office of Compliance, Inspections and Examinations National Examination Risk Alert in the Addendum and companion website.[2]) Bottom line: They reminded us all that the old rules applicable to investment advisors apply to social media, too.

The SEC is adapting to social media; for example, it has recognized the concept of Internet investment advisors interacting through social media. They now offer special registration rules allowing such advisors who interact with all of their clients (and a maximum of 15 non-interactive clients) through a website to register only with the SEC, avoiding cumbersome state registration.

The investment advisory world got even more nervous about compliance in June 2013 when FINRA announced spot checks for compliance in the social media space. The spot checks basically require you to say what you're going to do, then do what you say in the social media space. To deal with these spot checks, you should specifically document your social media policies and their use, and have measures in place to assure your team's compliance with your policies.

  • [1] “Investment Advisers Act of 1940,” SEC, .pdf. Accessed June 13, 2014.
  • [2] SEC Office of Compliance Inspections and Examinations, “Investment Adviser Use of Social Media,” National Examination Risk Alert, January 4, 2012, about/offices/ocie/riskalert-socialmedia.pdf.
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