More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- The Custody Rule and its Ramifications When an RIA takes custody of a clients funds or securities, risk to that individual increases dramatically. Rule 206(4)-2 under the Investment Advisers Act (better known as the Custody Rule), was passed to protect clients from unscrupulous investors.
Trade groups and broker-dealers continue to find fault with the Financial Industry Regulatory Authority’s plan to require firms to link to BrokerCheck in their online marketing.
In particular, many argue that posting BrokerCheck links on social media and other third-party sites where their bios appear is unworkable.
FINRA filed the first iteration of its rule in January 2013, but BDs complained that the plan was unworkable. FINRA reworked the plan, with its board authorizing in February that the self-regulator seek comment on a revised proposal to require that firms that serve retail investors include a link to BrokerCheck on their websites.
On April 30, FINRA put the proposal out for a public comment period that expired on June 16.
It also deleted the controversial requirement that firms include “deep links” to a broker’s individual profile on BrokerCheck.
While the BD firms applauded FINRA for attempting to raise public awareness of BrokerCheck through the reworked plan — with some stating that the plan will indeed raise investor awareness of the disciplinary database — they still voiced concerns, most notably about linking to third-party websites.
FINRA's proposed rule would require advisors to include a prominent description and link to BrokerCheck on their social media accounts and other third-party sites that contain biographical information. There are some exceptions, such as directories that advisors have no control over.
The link requirement would not apply to email or text messages, a retail communication posted on an online forum (such as a message board, Twitter feed or chat room), or a directory or list of associated persons limited to names and contact information.
The Securities Industry and Financial Markets Association said in its comment letter that the proposed rule’s “imposition of mandatory content and linking requirements on third-party sites not controlled by member firms continues to raise necessity and feasibility concerns.”
SIFMA notes that “space constraints” within social media sites “may make the inclusion of both a ‘reference’ and hyperlink difficult or impossible to comply with without crowding out of the profile page the essential information the firm or its associated person wishes to convey in using the platform.”
For example, SIFMA says, a member firm “may devote considerable effort and expense to creating a branded custom header within Twitter. That custom header may or may not include text, but the platform does not permit embedded hyperlinks within those profile headers.”
In addition, on the main profile page, SIFMA continues, “only one link to an external site is permitted. Most firms, quite appropriately, would prefer to utilize the ‘link’ space to post a link to their firm’s primary homepage.” However, the rule as written “would potentially require the firm to use that link space for a link to BrokerCheck since, technically, a link to a third-party website is permitted, unless the firm also includes in the third-party social media website ‘a disclosure that informs the reader that a hyperlink to BrokerCheck is available’ through the link to the firm’s homepage.”
FSI states that while FINRA’s goals with the requirements related to third-party websites “are laudable, many aspects of these requirements may not be feasible, and it is unclear whether they will actually increase traffic and awareness of BrokerCheck.”
FSI noted that "several challenges" remain with respect to third-party websites, specifically social media sites. "Firms will incur significant costs and operational burdens to implement the requirements and monitor for compliance," FSI said. "Automated solutions for implementing the BrokerCheck link to all advisor social media accounts do not currently exist and would be very expensive for firms to create. As a result, the BrokerCheck link will require firms to create new written materials and policies with respect to the required BrokerCheck link."
Charles Schwab agreed that while many of the “primary operational considerations” have been addressed in the reworked plan, “concerns remain on the hyperlinking for sites not controlled by firms as linking protocols on sites vary widely, are not subject to broker-dealer control and may change with little or no notice to the broker-dealer.”In many instances, Schwab continued, “it may not be possible to add a hyperlink, BrokerCheck URL or deep link because of layout, space constraints and limited technology capabilities.”
Schwab noted that “as third-party social media websites continue to evolve, and in some cases be leveraged by other technologies including mobile, FINRA’s prescriptive direction may not be implementable under different scenarios.”
Schwab said that it continues to advocate for “a more generalized approach to the requirements including the ability to have ‘optional locations’ on the social media websites noted.”
Commonwealth Financial Network told FINRA in its comments that it should “add explicit language” to the proposed rule that “excludes third-party sites not adopted by the member or with which the member has not become ‘entangled.’”
Said Commonwealth: “The rule should explicitly state the position that FINRA has taken in previous Regulatory Notices 10-06 and 11-39 — that third-party sites not ‘adopted’ by the member are not retail communications by the member.”
In addition, Commonwealth said that FINRA should modify the proposed rule so that “it does not require the BrokerCheck hyperlink to appear both on the homepage of the member’s site and in close proximity to the associate person’s profile.”
NFP Securities opined that FINRA's plan is "redundant," as industry standards require BDs to indicate their FINRA membership in their online communications with the public and provide a hyperlink to the FINRA homepage, which contains "a prominent link to BrokerCheck." NFP suggested that FINRA amend its rule proposal say that a firm linking to FINRA's homepage "is sufficient to meet the BrokerCheck requirement."
Said Mendelsohn: "While our firm has nothing to fear from putting a BrokerCheck link on our website or electronic communication, each new rule makes compliance more and more difficult for a small firm and can easily lead to unintended violations, when we have to deal with a 1000+ page FINRA Rulebook."
A FINRA spokesperson told ThinkAdvisor that the revised plan will go back to FINRA's board only "if material changes are made such that further board review and approval is necessary or appropriate." Once FINRA files the proposal with the Securities and Exchange Commission, the SEC would then publish it for comment.
Related on ThinkAdvisor: