Social Media Scrutiny
Social media’s influence on consumers and investors continues to expand even though social gatherings have picked up as the pandemic has receded. Prospecting for clients through social media is an effective augmentation to using traditional methods of sources of influence, charity events, and other civic gatherings. Many investors now research financial advisors on-line and through LinkedIn and various other social media platforms. Recognizing this trend in investor preference, in September of 2021 FINRA began a dedicated program to investigate firm’s policies and procedures to ensure financial advisors did not violate FINRA rules regarding acquisition of new clients through social media.
In February FINRA issued an update on its targeted examination of FAs’ use of social media and social media influencers as a tool for client acquisition. While FINRA’s “sweep” is targeted towards firms, FAs need to be mindful that FINRA’s investigation of a firm can uncover improper use of social media by individual FAs–which can cost them their jobs and severely tarnish their U-5s. It’s a good reminder that FAs should know and follow their firm’s social media policy.
In February FINRA announced a $5,000 fine and 10 day suspension of an FA who made posts on a social media page that violated FINRA’s rules regarding communications with the public.
The broker’s post made positive statements about the returns realized in an investment club and hedge fund, but did not discuss any of the risks associated with these investments. The FA also made posts about the benefits of options transactions but did not warn that options investments is not suitable for all investors. The FA ran afoul of FINRA rules because he went beyond general descriptions of the benefits of options and described in detail specific transactions prior to disclosing or delivering documents disclosing the risk of options. The FA also got in trouble because he did not obtain advance approval from FINRA’s advertisement and regulation department at least ten days prior to making those posts.
The take-away is that social media is a valuable prospecting tool that is here to stay. Before making posts discussing investments, those posts should be cleared with FINRA’s advertising department to protect the advisor as well as the firm that employs them.
Be Careful When Presenting PPMs
FINRA fined an FA $7,500 and suspended him for one month because he solicited prospective investors into a private placement before the FA had a substantial relationship with the prospective investors. The FA made a mistake because neither he nor his firm had any substantive relationship with any of the prospective investors and the FA did not obtain investor questionnaires prior to the time the investors invested in the private offering.
Continuing Education Testing Tip
FINRA came down hard on an FA who took the Series 7 examination remotely. The rules required all test takers to store all personal items including study materials and electronic devices outside of the testing location. During the exam, the FA had personal items in the test room including study materials and an electronic tablet. While there was no evidence the FA used the study materials or electronic device to cheat, the fact that those materials were in the room despite instructions prohibiting him from having them in his possession led to a massive penalty. Specifically, FINRA suspended him for 18 months and fined him $5,000.
The take-away is that any issues or violations involving honesty, integrity, or cheating generally leads to substantial enforcement penalties from FINRA.