FINRA Releases Additional Guidance Related to Social Media

FINRA social media

The Financial Industry Regulatory Authority recently released Regulatory Notice 17-18, which contains guidance pertaining to social networking websites and business communications.

FINRA clarified a number of topics, including:

  • Member firms are obligated to retain a record of communications that occur via text messaging applications and chat services between its registered representatives and investors in accordance with Rules 17a-3 and 17a-4 promulgated under the Security Exchange Act of 1934, as amended, and FINRA Rule 4511.
  • An associated person may, in a personal communication, link to content made available by its firm that does not pertain to the firm’s products or services without implicating FINRA Rule 2210.
  • If a firm shares or links to content posted by a third-party website (e.g., an article or a video), the firm has adopted such content and must ensure that the content, when read together with the firm’s original post, complies with the same standards applicable to communications created by the firm. If the shared or posted content contains links to other content, a firm generally does not adopt that other content, although the firm may be deemed to have done so in certain circumstances (e.g., if the firm controls such other content). A firm may link to a section of a third-party website without adopting the content of such website if the link is continuously available to investors via the firm’s site (regardless of whether the linked site contains favorable information about the firm), the linked site could be updated by the third party and investors would still be able to use the link, and the firm does not influence or control the linked content.
  • Firms may use native advertising (i.e., advertising that appears alongside and in a manner similar to content posted by the publisher) provided that such advertising complies with FINRA Rule 2210, among other requirements.
  • Comments or posts about a firm’s brand, product or services that the firm has arranged to be posted must be labelled as advertisements. In addition, if a registered representative likes or shares favorable comments about him or herself that are posted by third parties on an unsolicited basis to such registered representative’s business-use social media website, the registered representative would be deemed to have adopted the comments and such comments would be subject to FINRA’s communication rules, including the prohibition on misleading or incomplete statements.

The guidance supplements, but is not intended to alter, guidance contained in previous FINRA regulatory notices pertaining to social media.

Regulatory Notice 17-18 is available here.

©2017 Katten Muchin Rosenman LLP

FINRA (Financial Industry Regulatory Authority) Issues New Rules on Securities Borrowing, Customer Protection and Callable Securities

Katten Muchin


On December 4, 2013 the Securities and Exchange Commission approved rules proposed by the Financial Industry Regulatory Authority regarding securities loans and borrowings, permissible use of customers’ securities, and callable securities. For securities loans and borrowings, Financial Industry Regulatory Authority proposed new Rule 4314, which requires a member firm acting as an agent in a securities lending or borrowing transaction to disclose its capacity as agent. The rule aims to clarify whether parties are acting as principals or agents when entering into security lending or borrowing agreements. When member firms loan securities to or borrow securities from a counterparty acting in an agency capacity, the rule requires the member firm to maintain books and records to reflect the details of the transaction with the agent and each principal on whose behalf the agent is acting as well as the details of the transaction. The rule allows a member firm that is a party to a loan or borrowing agreement with another member firm to liquidate the transaction whenever the other party becomes subject to one of the specified liquidation conditions. Additionally, no member firm can lend or borrow any security to or from any person that is not a member of FINRA, including any customer, except pursuant to a written agreement. Each member firm subject to Securities Exchange Act Rule 15c3-3 that borrows fully paid or excess margin securities from a customer must comply with the Securities Exchange Act Rule 15c3-3 requirements for a written agreement between the borrowing member firm and lending customer.

FINRA also adopted new Rule 4330 regarding the permissible use of customers’ securities. The rule prohibits a member firm from lending securities held on margin for a customer that are eligible to be pledged or loaned unless the member firm first obtains written authorization from the customer permitting the lending arrangement. The rule also requires a member firm that borrows fully paid or excess margin securities carried for a customer account to comply with Securities Exchange Act Rule 15c3-3, provide notices to customers in compliance with Securities Exchange Act Section 15(e), and notify FINRA at least 30 days prior to the borrowing. Before any member firm engages in a securities borrowing transaction with a customer, the rule requires the member firm to have reasonable grounds for believing that the customer’s loan of securities is appropriate for its financial situation and needs and that the member firm provide certain disclosures to the customer in writing. A FINRA member firm is also required to keep books and records evidencing compliance with these rules.

Finally, FINRA adopted new Rule 4340 to clarify requirements applicable to callable securities. The rule requires each member firm with possession or control of a callable security, in the event of a partial redemption or call, to identify such securities and establish an impartial lottery system to allocate the securities among its customers. The member firm must also provide written notice, which may be electronic, to new customers opening an account and to all customers once a year that describes how customers may access the allocation procedures on the member firm’s website or obtain hard copies upon request. The rule prohibits a member firm from allocating securities to its own or an associated person’s account during a redemption until all other customers’ positions have been satisfied. This prohibition applies only when the redemption is offered on terms favorable to the called parties. When on unfavorable terms, a member firm cannot exclude its positions or those of its associated persons from the redemption.

The proposed rules with links to amendments, comments, and the approval order may be accessed here.


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Key Financial Industry Regulatory Authority (FINRA) Regulatory Focus of 2013: Retail Sales of Complex Products, According to Annual Letter [VIDEO]

The National Law Review recently published an article, Key Financial Industry Regulatory Authority (FINRA) Regulatory Focus of 2013: Retail Sales of Complex Products, According to Annual Letter [VIDEO], written by Mark T. Carberry with Neal, Gerber & Eisenberg LLP:

Neal Gerber

In January, the Financial Industry Regulatory Authority (FINRA) published its annual letter identifying its regulatory and examination priorities for 2013, a document intended to “represent [FINRA’s] current assessment of the key investor protection and market integrity issues on which [FINRA] will focus in the coming year.”

Although numerous such issues were identified by FINRA in its letter, including issues relating to the sale of private placement securities, anti-money laundering compliance, insider trading, margin lending practices, and algorithmic trading, a substantial focus for 2013 relates to suitability concerns and the sale of complex products to retail investors.

Economic Environment Sharpens FINRA’s Concern

FINRA specified in its letter a number of current general economic factors giving rise to concerns about retail investors purchasing complex products:

  • FINRA believes the “slow growth, low-interest rate environment…” has challenged retail customers to seek returns outside their stated risk tolerance;
  • “[A]n unprecedented compression of credit risk premiums and yields…;”
  • The fact that retail investors are, therefore, increasingly transferring funds from equity to debt markets;
  • Retail investor “appetite for yield…” has increased prices on investment-grade and high-yield debt issues, limiting substantially upside growth while exacerbating risk of loss.

In light of the above factors, FINRA expressed its particular concern “about sales practice abuses, yield-chasing behaviors and the potential impact of any market correction, external stress event or market dislocation on market prices.”

3 Complex Products Earn Particular FINRA Scrutiny

While FINRA’s assessment again identifies numerous complex products in previous annual reviews, including non-traded REITs and leveraged and inverse ETFs, FINRA singled-out the following three “recently surfaced…” products as potentially unsuitable for retail investors in the current economic environment, given their underlying market, credit and liquidity risk factors:

  • Business Development Companies (BDCs): BDCs, typically closed-end investment companies, are highlighted due to, among other things, their investment in the corporate debt and equity of private companies;
  • Leveraged Loan Products: These adjustable-rate loans are extended by financial institutions to companies with low credit quality;
  • Commercial Mortgage-Backed Securities: FINRA is concerned retail investors are not being advised by their registered representatives of the “considerable risks given today’s low-interest-rate, low-yield environment.”

FINRA’s Recommended Supervisory Points of Emphasis

Supervisory policies and procedures regarding the sale of complex products to retail investors will be subject to particular scrutiny in 2013. FINRA’s Regulatory Notice 12-03 (“Complex Products-Heightened Supervision of Complex Products”), offers substantial guidance regarding heightened supervisory procedures that may be appropriate. In brief, some of these supervisory procedures may include:

  • Suitability: Is there a process to ensure the mandatory suitability analyses have been undertaken, particularly in light of FINRA’s revised suitability rule (FINRA Rule 2111)?
  • Post-Approval Review: Is there a supervisory process in place to reassess – post-sale – the performance and risk profile of existing complex products? Does this process also capture any complaints received from customers relating to a particular complex product?
  • Training: Registered representatives who recommend complex products must have a thorough understanding of all features and risks of a given product to enable them to articulate such features and risks to retail clients. Have sufficient resources been allocated to such training, and is there a process in place to ensure this training was utilized and effective?
  • Financial Sophistication of Clients: FINRA recommends that firms adopt the approach mandated for options trading accounts – that financial advisors must have a reasonable basis to believe that a retail client is sufficiently knowledgeable in financial matters, that he or she is capable of evaluating the risks of a recommended transaction and that the client can bear the associated financial risks.
  • Discussions with the Client: In recommending a complex product, a registered representative should thoroughly discuss all features of the product, how the product is expected to perform under different market conditions, the risks of the product and potential returns and the costs of the product. Fundamentally this should be undertaken in a manner most likely to facilitate the client’s understanding of the product.

In sum, as advised in its letter, FINRA is “particularly concerned about firms’ and registered representatives’ full understanding of complex or high-yield products, potential failures to adequately explain the risk-versus-return profile of certain products, as well as a disconnect between customer expectations and risk tolerances.”

For these reasons, supervisory procedures regarding sales of complex products to retail investors in large part must be designed – and enforced – with the intent to give financial advisors the ability to provide credible, substantive responses to the regulatory inquiry, “How did you educate yourself regarding the particular features and risk factors of this product?” and “How did you effectively communicate that information to your (suitable) client?”

© 2013 Neal, Gerber & Eisenberg LLP