In the previous 2023 Q1 regulatory update, Smarsh shared how the first quarter saw regulators get increasingly focused on enforcing the books and records rule. Firms are facing heavier fines and penalties — particularly for off-channel digital communications.
Individual aren’t escaping the scrutiny either.
The big violations (and fines) of Q1 2023
Hasty social media marketing results in fine and suspension
Financial Industry Regulatory Authority (FINRA) fined a registered representative $5,000 and issued a 10-business-day suspension for social media posts on a public Facebook page. The posts included:
- Investment returns
- Industry standing
- Purported successes of the investment club and a separate hedge fund
- Options-related posts that don’t explain investment risks or warnings that options may not be suitable to all investors
Additionally, the representative failed to obtain approvals for the social media posts through FINRA’s Advertising Regulations Department at least ten days prior to the use of the posts.
CCO on hook for supervisory failures
FINRA fined a CCO $5,000 and suspended her for 40 business days for failure to reasonably supervise the sales practices of two registered representatives. The CCO approved a representative’s recommendation of new variable exchanges to 11 customers. The CCO also failed to investigate red flags indicating that another representative was conducting securities business through an unapproved email account.
Despite being assigned supervisory responsibilities, she did not review or ensure retention of business-related emails despite being advised by FINRA that the representative and office staff were continuing to use the outside email account to conduct securities business.
Firm reportedly fining employees for tarnishing firm reputation
A firm fined $200 million in the U.S. Securities and Exchange Commission’s (SEC) ongoing off-channel communications sweep exam is reportedly punishing employees responsible for the violations. Ranging from a few thousand dollars to more than $1 million per individual, the penalties are for the misuse of WhatsApp and other messaging applications to conduct off-channel communications for business.
These fines were reported to affect either the employee’s future pay or clawbacks on bonuses already received.
Celebrity sponsorships come with a price
The quarter held several instances of celebrities fined for touting crypto assets on social media without disclosing that they were paid to do so. Penalties and disgorgements range anywhere from $4,000 to $1.5 million.
The SEC has stated that failing to disclose compensation violated Section 17(b) of the Securities Act, which makes it unlawful for any person to promote a security without fully disclosing the receipt and amount of such compensation from an issuer.
Emojis need to be captured and archived
A judge from the United States District Court of the Southern District of New York ruled that certain emojis would be considered financial advice or indicate a return on investment. The court stated that the use of the “rocket ship” emoji (🚀), “stock chart” emoji (📈), and “money bags” emoji (💰) violated security law by misleading the public to expect a financial return on investments in Tweets about NFTs.
Prepare for the rest of 2023
It’s more important than ever for individuals to revisit their fiduciary responsibilities and their firms’ WSPs and policies on digital communications. While it’s understandably important to be able to reach and engage with clients on their preferred channels, individuals need to understand how off-channel communications can create compliance, career and monetary risks.
But that isn’t to say that today’s off-channel communications will forever be off limits. If there’s enough demand from prospects, customers and others within your firm, it may sway your firm’s compliance team to expand their permitted channels. After all, communication trends, habits and technologies are constantly changing.
Author: Tiffany Magri – Regulatory Advisor at Smarsh
As a Regulatory Advisor at Smarsh, Tiffany monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.
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