Views on improving the integrity of global capital markets
04 November 2016

FINRA’s Role in Regulating Financial Services Advertising: Challenge of Social Media

The 21st Annual GIPS Standards Conference will be held 14–15 September 2017 in San Diego, California.

What responsibility does the Financial Industry Regulatory Authority (FINRA) have in regulating advertising, especially with the changing nature of advertisements in the social media age? Thomas Selman, CFA, who is the Executive Vice President, Regulatory Policy, and Legal Compliance Officer at FINRA, and Alexander Gavis, who is Senior Vice President and Deputy General Counsel in the corporate legal department at FMR LLC, discussed these questions at the 2016 GIPS Standards Annual Conference.

FINRA’s Role in Advertising

FINRA is a self-regulatory organization for the securities industry in the United States and is dedicated to investor protection and market integrity. Virtually every broker/dealer is required to be registered with FINRA. FINRA has the ability to expel member firms and individuals from the industry, if necessary, for rules violations. Selman indicated that FINRA is subject to oversite by the SEC.

Selman manages FINRA’s Advertising Regulation Department, which is responsible for administrating FINRA’s advertising rules. Certain types of advertising, including mutual fund and variable product materials, must be filed by brokerage firms with this department, typically within 10 days of first use. The Advertising Regulation Department reviews these submissions for compliance with both FINRA rules and SEC rules, including Rule 482 on advertising requirements. The department also recommends changes and updates to their advertising rules. All rule changes must be approved by FINRA’s board as well as the SEC after a public comment process.

Retrospective Rule Review

FINRA is going through what is called a “retrospective rule review” as it tries to strike a balance between fair and balanced disclosure and disclosure that is not particularly useful. Each communication cannot be viewed like a prospectus. Similarly, only materials that need to be reviewed should be required to be filed with FINRA. As a result of the review so far, certain documents that were previously required to be filed, such as mutual fund fact sheets, will no longer need to be filed in the future.

As part of the retrospective review, FINRA will be looking at the areas of investment performance and social media. For example, they will consider whether it should modify the current rules to allow more types of performance information to be presented in the context of one-on-one financial planning, including perhaps the presentation of performance projections. FINRA currently does not allow most projections of performance to be presented because this scenario is where it has seen the most egregious examples of materials that are specifically designed to mislead investors. Selman indicated that if FINRA revises the rules, it will likely continue to not allow back-tested performance. He also said that FINRA may take a look at performance portability, which he referred to as “related performance.”

Selman highlighted how technology has been a key communication changer between investors and advisers, particularly in the ways brokerage firms distribute advertising. In the past, mutual funds would advertise through newspapers and magazines and distribute marketing materials through the mail. Today, the broad use of the internet as well as social media platforms have made it challenging for regulators to keep up.

For example, it could be difficult to meet certain disclosure requirements when the communication is delivered through a mobile device. So, one consideration is giving firms the ability to provide layered and customized disclosures through additional communications instead of providing it all at once.

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About the Author(s)
Ken Robinson, CFA, CIPM

Ken Robinson, CFA, CIPM, is a director of investment performance standards at CFA Institute. He helps maintain the GIPS standards by managing the interpretations process and developing guidance for new technical areas.

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