FINRA Clarifies Rules Concerning Social Media and Digital Communications

The Financial Industry Regulatory Authority (“FINRA”) issued a regulatory notice that addresses the use of digital communications and social media by FINRA member firms. FINRA recognized the expansion of social media and digital communication by broker-dealers, which prompted this guidance, updating the 2011 guidance. The new regulatory notice focuses on text messaging, personal versus business communications, third-party content, hyperlinks, native advertising, testimonials, endorsements, and links to BrokerCheck.

The updated guidance addresses the recordkeeping requirements in Rule 17a-4, which ensures certain communications are preserved. FINRA reminds firms that sharing or linking to specific content, such as a video or article, is a communication by the firm subject to Rule 2210 filing and content requirements. FINRA also clarifies that linking to or sharing an independent third-party website may be subject to Rule 2210 requirements, depending on whether the hyperlink is “ongoing” and whether the firm has influence over the content.

FINRA member broker-dealers may use native advertising, but it must comply with Rule 2210. This means that the advertising must be balanced, fair, and not misleading. Additionally, if a firm arranges for an individual to make a comment or post that promotes the firm, its products, or its services, the communication must comply with Rule 2210 and the firm must identify the communication as an advertisement. Similarly, FINRA reiterated that posts by customers or other third parties on the firm’s website or social media sites are not communications with the public and are not subject to the Rule 2210 requirements. However, if the firm or one of its registered representatives “likes” or shares any of the comments the customers or third parties post, the content becomes subject to the communication requirements of Rule 2210.

In light of these guidelines, FINRA members are advised to review their digital communication policy to ensure compliance with the recently issued regulatory notices.

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Legacy ERISA Regulation Triggers Fiduciary Acknowledgement and Disclosures from Plan Advisers

By Monte Schatz

The Department of Labor’s fiduciary rule became effective June 9, 2017.  A whole new set of client disclosures will be required for advisers who previously were not operating under the fiduciary standard.  Interestingly, many of these disclosure requirements are not mandated by the fiduciary rule itself, but under a regulation that was part of the Employment Retirement Income Security Act of 1974 commonly referred to as ERISA.

29 C.F.R. § 408(b)(2) requires certain pension plan service providers to disclose information about the service providers’ compensation and potential conflict of interests.   Ironically, this regulation was introduced originally as an interim rule in 2010.  It was published as a final rule on February 3, 2012.  The intent and purpose of the regulation was to assist plan fiduciaries in assessing the reasonableness of compensation paid for services.  Also, the disclosure requirements are designed to assist plan fiduciaries to act prudently and solely in the interest of the plan’s participants by defraying reasonable expenses of administering the plan and avoiding conflicts of interest.

From 2012 to the present day, brokers and other non-fiduciary providers to ERISA retirement plans largely didn’t disclose they were fiduciaries.   However, with the institution of the fiduciary rule the status of those types of advisers have been elevated to the fiduciary standard which triggers the new disclosure requirements.  This subjects those groups to covered provider status.  The three major categories of covered service providers include:

(1) fiduciary investment managers and advisors,

(2) record keeping platforms and broker/dealers, and

(3) providers of other types of services that also receive revenue sharing payments                   or other “indirect” compensation other than from the plan or plan sponsor

The groups that fall under the provisions of 408(b)(2) must provide updated disclosures to plan fiduciaries within 60 days from the date of which the covered service provider is informed of such a change in status.   The 60 day standard is vague as it doesn’t define whether it is June 9th, 2017 or if the 60 days begins to run from the first day an adviser makes an investment recommendation post-June 9th.   The general consensus is to take the conservative approach and commence providing updated disclosure immediately and assume the 60 day clock runs from June 9th, 2017.

For advisers who previously have operated under the fiduciary standard the 408(b)(2) requirements will be “business as usual”.  For those advisers that are new to the fiduciary standard it is imperative that they provide the required disclosures in a concise and understandable one page format.   Previous plan adviser agreements that placed disclosures in multiple documents will no longer satisfy the disclosure requirements that are a critical part of the fiduciary rule.

© 2017 Vandenack Weaver LLC
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SOURCES:

http://www.investmentnews.com/article/20170608/FREE/170609941/the-disclosure-401-k-advisers-may-be-missing-under-the-dol-fiduciary?utm_source=Morning-20170609&utm_campaign=investmentnews&utm_medium=email&utm_visit=655100

http://www.investmentnews.com/article/20120202/FREE/120209978/labor-department-unveils-kinder-gentler-fee-disclosure-regs

http://webapps.dol.gov/federalregister/PdfDisplay.aspx?DocId=25781

Broker-Dealers Offered Opportunity to Provide Comments to FINRA Rules for Capital Formation

The Financial Industry Regulatory Authority, known as FINRA, is undergoing a review of internal operations and programs as part of a review process dubbed FINRA 360. FINRA, as an independent self-regulatory organization with the overall goal of protecting investors and creating efficiency in the markets, governs many in the financial services industry in conjunction with the securities and exchange commission. FINRA has been issuing notices and seeking comments from those in the industry, as part of FINRA 360, with the goal of identifying opportunities to further the FINRA mission.

Recently, FINRA started the review process for rules that pertain to broker-dealers and their involvement with the capital formation process, and has issued corresponding notices. One of the recent notices from FINRA includes regulatory notice 17-14, seeking comments regarding broker-dealers when involved with unregistered securities and operating funding portals. The broad spectrum of rules that fall within the purview of notice 17-14 include funding portals, crowdfunding, capital acquisition brokers, unlisted real estate investment trusts, and other administrative and operational rules for raising capital.

For those wishing to submit comments on the rules, FINRA has set a deadline of May 30, 2017. For more information, FINRA notice 17-14 can be found at the following link: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-14.pdf

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New Corporate Compliance Guidance Issued by the Department of Justice

Earlier this year, under the direction of the new Attorney General, the United States Department of Justice (“DOJ”) issued new guidance for corporate compliance programs. This guidance applies when the DOJ is investigating a business and determining how to prosecute a business for federal crimes, such as certain types of fraud. The DOJ notes that the recently issued “Evaluation of Corporate Compliance Programs” updates the prior guidance and does not replace or substantially alter the investigation process.

Currently, federal prosecution of a business will follow the United States Attorney Manual, which provides factors for determining whether to charge a business, negotiate a plea, or come to some agreement. When making these determinations, the government will, among other items, evaluate the compliance program instituted by the business entity. The new guidance specifically pertains to the business compliance program pertaining to fraud prevention. The new fraud compliance guidance lists 11 topics to be evaluated by the DOJ, including Analysis and Remediation of Underlying Misconduct, Risk Assessment, Senior and Middle Management, and other topic areas.

The new guidance provides granularity and clarity regarding the DOJ evaluation of corporate compliance programs, when facing corporate criminal investigations. Although designed for corporate criminal investigations, this should guide companies implementing a compliance program, especially those in highly regulated industries, such as healthcare, pharmaceuticals, and securities. The updated factors issued by the DOJ can be found at the following link: https://www.justice.gov/criminal-fraud/page/file/937501/download

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Supreme Court Issues Ruling on Insider Trading Case

In its first insider trading decision in nearly two decades, the United States Supreme Court upheld the insider trading conviction of Bassam Salman and reaffirmed the three-decade-old personal benefit standard applied to insider trading violations under federal securities laws. Salman was convicted of securities fraud, after making over $1 million by trading on a tip from his brother-in-law, who was an investment banker with Citigroup at the time.

To prevail in an insider trading case, the Securities and Exchange Commission (“SEC”) must establish that the person who gave the tip, the “tipper”, received a personal benefit in exchange for giving non-public information to the tippee. The Supreme Court ruled that the personal benefit test is satisfied if the tipper gifts the confidential non-public information to a relative or friend. This result is different from the Second Circuit case, United States v. Newman, which stated that the personal benefit test requires an insider to receive something of a pecuniary and valuable nature in exchange for the information. The Supreme Court noted in Salman v. United States that the Newman outcome is inconsistent with the requirements of the personal benefit test and clarified the test is satisfied even in the absence of a tipper’s receipt of a pecuniary benefit.

Notably, the Supreme Court did not address several pressing issues with insider trading. While the Supreme Court stated the personal benefit test is not necessarily satisfied when a tipper discloses information to anyone, it did not specify how close a relationship is required between a tipper and tippee, outside the context of relatives or friends. Similarly, the Supreme Court did not address the constitutionality of aggressive enforcement tactics, including the SEC’s use of the “rocket docket”. The “rocket docket” requires cases to be decided within 300 days of filing, and consequently leaves little time to prepare for a hearing. It is unclear whether the Supreme Court intends to address these concerns in the near future.

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SEC Updates Rules for Capital Raises Through Regulation D

Over the past couple of years, the Securities and Exchange Commission (“SEC”) has evolved how companies can raise capital, while simultaneously maintaining adequate protection for investors. For example, starting in May of 2016, companies were provided the option of raising capital through the newly created Regulation Crowdfunding, but the SEC was not finished modernizing the laws for exempt securities issuance. On October 26, 2016, the SEC finalized rules amending Regulation D, which contains exemptions from securities registration.

 

Many non-public companies, at all stages, rely on Regulation D for capital raises. Depending upon the unique circumstances of the company, the company may have utilized registration exemptions under rule 504, 505, or 506 of Regulation D. However, exemption under rule 505 became disfavored compared to rule 504 and 506 because of the additional, and oftentimes onerous, regulatory requirements. Recognizing this trend, the SEC finalized rules that increased the amount a company can raise under rule 504 to $5,000,000 dollars, up from $1,000,000, in a 12-month period. This means that the same amount of capital can be raised under rule 504 as was possible under rule 505, allowing the SEC to repeal rule 505.

 

For most companies relying on Regulation D to raise capital, the factors used before the rule change will likely continue to be the predominate factors when determining whether to use rule 504, often referred to as the “seed capital” exemption, or rule 506 exemption. For example, an entrepreneur in the first few years of business that requires additional capital to get a product, currently in research and development, to the market, will likely look to rule 504, which limits the total money raised, but is more navigable for new companies. Moving forward, as the SEC undergoes a change of leadership, starting when SEC Chairwoman Mary Jo White steps down in early 2017, these rules may continue to evolve and any company looking to utilize a Regulation D exemption should consult with legal counsel. For more information on the current changes under SEC Regulation D, please visit the following SEC website: https://www.sec.gov/news/pressrelease/2016-226.html

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SEC Order Permits Companies to Use In-Line Structured Data Filings

A recent order from the Securities and Exchange Commission (“SEC”) permits companies to file financial statements with the SEC in a new format. Companies may now use Inline XBRL, which embeds structured data in the filing. The format uses machine readable tags and designed for better quality data and lower filing costs.

The SEC’s decision is part of its effort to improve the access and transparency of disclosures. The agency is hopeful the new filing capability will increase the use of XBRL data by investors and other market participants and lower errors in financial statements. Companies may use the new format on a voluntary basis through March 2020.

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