The financial services industry is witnessing an unprecedented emphasis on sales practices and communications with the public, driven by a range of regulators of the financial services industry, including the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the National Association of Insurance Commissioners (NAIC). This blog post explores the latest developments in this area for each of these entities, and what they mean for firms within the financial services sector.
The SEC’s Stance
The SEC has long been a proponent of transparency and accountability in communications with investors and the public. Recently, the Commission has intensified its scrutiny on how financial services entities communicate, especially in the digital age where information dissemination is rapid and far-reaching. In 2020, the SEC adopted the modernized marketing rule for investment advisers. Those amendments created a single rule that replaced the former advertising and cash solicitation rules. Since the new rule adoption, there have been ongoing SEC Marketing Rule enforcement sweeps resulting in charges and penalties to many firms, as well as potential reputational damages. The SEC’s focus is on ensuring that communications are not only accurate and not misleading but also that they provide investors with the information necessary to make informed decisions.
In a separate major enforcement action, the SEC announced charges against a collective of financial firms for extensive and long-term failures in maintaining and preserving electronic communications. This action emphasizes the regulatory focus on communications with the public, spotlighting the crucial need for adherence to recordkeeping provisions under federal securities laws as defined per SEC Rule 17a-4.
The charges were levied against a mix of broker-dealers, dually registered broker-dealers and investment advisers, and affiliated investment advisers. These entities admitted to their respective violations, agreeing to pay combined civil penalties exceeding $81 million. This enforcement action underscores the SEC’s ongoing commitment to ensuring that regulated entities comply with recordkeeping requirements, which are pivotal for the Commission’s ability to monitor and enforce compliance with federal securities laws.
The investigations revealed widespread use of unapproved communication methods, including personal text messages and off-channel communications related to business activities, recommendations, and advice. The failure to maintain and preserve these communications not only violated federal securities laws but also potentially hindered the SEC’s investigative capabilities.
As part of the resolution, the firms are mandated to implement improvements in their compliance policies and procedures regarding the retention of electronic communications. This action highlights the importance of robust recordkeeping practices and the SEC’s focus on protecting investor interests and maintaining the integrity of the financial markets through strict regulatory oversight.
One of the critical areas of SEC’s focus has been on social media usage and the rise of platforms that financial advisors and firms use to communicate with clients and the public. The SEC is keen on ensuring that these communications comply with existing regulations regarding advertising, testimonials, and endorsements. This includes ensuring that any information shared through these channels is consistent with the firm’s official disclosures and filings.
FINRA’s Regulatory Efforts
FINRA, overseeing broker-dealers, has also ramped up its efforts to regulate communications with the public. The authority’s rules are designed to protect investors from misleading, inaccurate, or otherwise harmful information that could affect their investment decisions. FINRA Rule 2210, for example, governs communications with the public, setting standards for content, approval, recordkeeping, and filing requirements for different types of communications.
FINRA’s guidelines require firms to address the challenges and opportunities presented by the digital age, including social media and digital communication platforms. The guidelines stress the importance of supervisory systems to monitor compliance with these communication rules, ensuring that digital communications are treated with the same level of scrutiny as traditional forms of communication.
FINRA recently released the results of its November 2022 targeted exam to review the practices of its member firms that actively communicate with retail customers concerning crypto assets and crypto asset-related services. As part of this targeted exam, FINRA reviewed more than 500 such communications and identified potential substantive violations of FINRA Rule 2210 in approximately 70 percent of the communications. We detail more of those results in another one of our blog posts.
In addition, the recently released FINRA 2024 Annual Regulatory Oversight Report places significant emphasis on Communications with the Public, highlighting the necessity of comprehensive training and robust supervisory review procedures as effective practices. This approach underscores the importance of clear, accurate, and ethical communication in maintaining investor trust and adherence to regulatory standards. These priorities reflect FINRA’s ongoing commitment to elevating industry standards and safeguarding market integrity through informed and ethical practices.
NAIC’s Contributions
The NAIC, which oversees the insurance sector, has also shown a heightened focus on communications with the public. In their 2024 Strategic Priorities, the NAIC outline an emphasis on Marketing of Insurance Products. This is particularly relevant given the complex nature of insurance products and the critical importance of clear, accurate, and helpful information for policyholders. The NAIC’s model regulations and guidelines encourage transparency and honesty in insurers’ communications with the public, aiming to enhance consumer protection and trust in the insurance industry.
One of the NAIC’s key focuses has been on the clarity and understandability of insurance product information and disclosures. This includes guidelines for marketing materials, policy documentation, and consumer communications, ensuring they are not misleading and provide a clear understanding of the product offerings, benefits, and exclusions.
Conclusion
The heightened regulatory focus on communications with the public across the SEC, FINRA, and NAIC reflects a broader trend in the financial services industry towards greater transparency, accountability, and consumer protection. Financial institutions must pay careful attention to these regulatory signals, adapting their communication strategies to comply with the evolving landscape. This involves not only adhering to specific rules and guidelines but also fostering a culture of transparency and ethical communication throughout the organization.
As the regulatory environment continues to evolve, firms that proactively engage with these changes and integrate them into their operational practices will be better positioned to build trust with their clients and the public, ultimately contributing to a more stable and trustworthy financial system.
How RegEd Can Help
RegEd’s Enterprise Advertising Review solution is the industry’s leading enterprise solution, powered by advanced capabilities that integrate AI technology to automate and streamline marketing compliance review and speed time to market. By using RegEd’s Enterprise Advertising Review system and its AI-powered tools, firms can significantly reduce the compliance risk associated with communications with the public, while improving operational efficiencies, including time to market.
Enterprise Advertising Review boasts a range of advanced features, including AI-powered Language Detection, which automatically identifies problematic keywords and phrases. SMART Disclosures and Document Compare functionalities automate elements of compliance reviews while significantly mitigating the risk of non-compliance. The solution also offers a user-friendly interface, robust hierarchy management, advanced indexing and search capabilities, and seamless integration with FINRA.