Common Marketing and Communications Compliance Mistakes

Navigating Common Compliance Pitfalls

Communication missteps, non-compliant marketing strategies and outdated procedures are all common pitfalls that can lead to significant risk for Registered Investment Advisors and Broker-Dealers. Listen to Part 1 of our two-part series on Common Compliance Mistakes as Oyster’s regulatory compliance experts Sarah Sutton, Candy Palugi and Dean Pelos uncover how to spot, prevent, and correct the following issues:

Communication Missteps: Closing the Gaps

Off-Channel Communications has become a major focus for the Securities Exchange Commission (SEC) and Financial Regulatory Authority (FINRA). Listen to our experts to:

• discover where CCOs often fall short in capturing off-channel communications such as texts and chat room interactions
• gain practical measures every firm should adopt to protect against compliance risks

Marketing Compliance Challenges

Marketing presents a minefield of compliance challenges. In this episode we will:

• identify common mistakes
• discuss the importance of routine reviews and updates to your firm’s marketing procedures
• share how to craft tailored disclosures in testimonials and endorsements to align with SEC requirements
• offer first-hand experiences with common issues during SEC exams

Practical Solutions for Risk Mitigation

This episode is essential for Chief Compliance Officers (CCOs) aiming to strengthen their compliance framework by recognizing and avoiding these all-too-common mistakes. Whether you’re new to regulatory compliance or have years of experience, these insights will help you sharpen your approach, reduce risk, and enhance the resilience of your compliance programs.

Regulatory Compliance Success with Oyster Consulting

Oyster Consulting has the expertise, experience and licensed professionals you need, all under one roof to protect your firm and your clients. Oyster’s regulatory compliance experts have the CCO, FINRA, SEC and state regulatory experience to help solve complex regulatory challenges. Oyster Consulting provides outsourcing and compliance support to broker-dealers and investment advisors, including risk assessments, testing, remediation, outsourced compliance roles and automated compliance solutions. 

Transcript

Transcript provided by TEMI

Bob Mooney:  Welcome to the Oyster Stew Podcast. I’m Bob Mooney, General Counsel for Oyster Consulting.  Communication documentation missteps and non-compliant marketing strategies are common pitfalls that can lead to significant risk for Registered Investment Advisors and Broker-Dealers.

Join us today for Part 1 of our two-part series on Common Compliance Mistakes.  Listen as Oyster’s regulatory compliance experts uncover how wealth management firms can prevent and correct common compliance issues around Off-Channel Communications and Marketing. Let’s get started – Sarah?

Sarah Sutton:  Thanks, Bob. My name is Sarah Sutton. I am a Managing Director at Oyster Consulting, and I have been with the firm since the fall of 2021. I currently work in the position of outsource CCO for both broker dealers and RIAs, and in different compliance support roles as well. My background has been in the finance industry since finishing college. I have had several different roles throughout my career on the retail side of the broker dealer and in the RIA world as a compliance officer. I was a retail branch manager for a regional firm in Memphis, Tennessee for a while, and again, joined Oyster in August of 2021. Today we are here to talk to you about common compliance mistakes and to go through some of the hot topics or more hot button items that we’ve seen here recently. Joining us is Candy Palugi.  Candy is an associate Director at Oyster. Candy, why don’t you tell us a little bit about yourself?

Candy Palugi:  Thanks, Sarah. I have been with Oyster for just about three years, and I have been in the industry just over 25 years. My experience in the industry ranges from back office and local branch offices for large regional and nationwide broker dealers and dually registered RIAs. I started working with investment advisors and register representatives at first, and then moved up to the back office where I became a Compliance Associate probably for the last 13 years. I’ve been in the compliance area doing surveillance oversight, deputy CCO work, and then as a consultant the last few years doing more of the same for many of our outsourced clients, CCO compliance, support, and other engagements to assist our firms.

Sarah Sutton:  Thanks Candy. We also have with us Dean Pelos. Dean is a Managing Director with Oyster. Dean, why don’t you tell us a little about yourself?

Dean Pelos:  Thanks, Sarah. My name is Dean Pelos. I’m a managing director at Oyster Consulting. I’ve been with Oyster for a little over 10 years and have experienced quite a bit with the company in terms of dealing with clients from the BD space, the RIA space, the fund space, including private funds, and registered investment companies. I’ve had many different roles as an outsource CCO for a lot of these entities. In addition, I provide a lot of compliance support as well to clients. I’ve been in the business for over 30 years now. I started out in the BD space and have continued to work with registered investment companies since I joined Oyster as well, and gained some experience in the fund space as well in the last 10 years with Oyster.

Sarah Sutton:  So today what we wanted to do is talk to you about common compliance mistakes that we’ve seen. One of the hot topics that a lot of folks are talking about regarding our industry, and I’m sure all of you have heard or seen some of the high level or the high dollar amount of fines in the industry, is off-channel communications. Dean, can you go through some things that you’ve seen with the different clients that you’ve worked with, give us some examples of some common mistakes that folks are making, and give us some ideas about some best practices that we can incorporate as well?

Dean Pelos:  Yeah, you bet, Sarah.  Off-channel communications – obviously there’s a lot of mistakes that are made throughout the year in compliance programs. There are mistakes that are made because you have clients, or you have companies that are out there that have to capture communications between their client and themselves when these things happen. Obviously, texting is a big deal in our environment. People love to text each other all the time. When you have clients that want to reach out to a registered investment advisor and they want to reach out to that individual at the company via text, sometimes those things do not get captured. You could be a small company, let’s say, where you can’t control the costs associated with archiving everything, so you’re separating things out. So, you’re limiting yourself to just archiving emails or archiving chat rooms, but you’re not archiving the texting that’s associated with that because there’s an additional cost.

The cost constraint is something that people think about. There are firms that are out there on the street that provide services where they archive everything for you, and they are a lot less expensive. We need to think about those things when we’re looking at this sort of thing because it’s not going away. Texts are always going to be there, and you need to be able to capture that information if you’re doing it regularly, and you have to be able to archive that information. So, consider other firms that can provide this service to you, where they can capture your emails and archive them in a compliant fashion.

In addition, texting, chat rooms, anything that you’re involved in with communicating with clients, it’s important that you think about “what can I limit my exposure to in this space when I’m communicating with clients? And are there vendors that are out there that can help me with this on a very low cost basis where I can protect myself, protect my investment advisor reps, or any kind of rep in this space and protect my clients as well?” These are important things, and as long as we’re doing that, we don’t have to worry about the other constraints around controlling this. For example, there’s a lot of firms out there right now that like to capture communications, and if they are texting, you can change policies and procedures around to say, if you do get a text from a client accidentally, and you can somehow respond to the client by saying, our policy is that we don’t text each other during the normal course of business. If it’s small talk, that’s one thing. But, if there are communications that are being texted back and forth, you have to be able to capture that somehow.

A lot of people change their policies to say, let’s capture this particular text because it came in by accident, forward it to my email address, respond to my client and say, I’m sorry we don’t text for business purposes; but in the future, please email me or call me on the phone and we’ll have a conversation. That’s one way around it, and you can have your reps attest that they are doing that; but that’s really not the easy solution here. There are different ways to handle this. Obviously, this is something that is going to be a continued issue and worthy of talking through it and creating best practices to solve these issues.

Sarah Sutton:  Thank you, Dean. I think we’ve all seen firms struggle with how to make sure that they’re capturing all of this information. And I know, we’re all human, so make sure that we don’t forget to respond a certain way or remind clients, because a lot of these clients, they’re also our friends or people that we’ve known for a while. You have that gray area of, they’re a client, they’re also a friend. What recommendation would you suggest to firms when their advisors ask about clients that are friends and clients, how they should handle their communication?

Dean Pelos: When you do have clients that you know very well – we’re all involved with the Know Your Customer (KYC) rules, where you know your client on a first name basis, you’ve dealt with them for years and years, you treat them like they’re your friend – sometimes they’re going to send you a text. So, what are the things that we can do to solve this issue? I think the easiest thing would be, again, to try and find a vendor that does capture texts and make sure that it’s affordable for your firm so that you can have it captured and archived and that way you’re circumventing establishing a separate policy and procedure around off channel communications. I think that would be the easiest thing. And again, there are vendors out there that do this all the time.

You do have firms that are seeking a low cost solution, and there are low cost solutions out there. That would be the easiest thing that I would do. And again, create a policy that’s effective and that you can follow up on with your reps to make sure that they understand that this is outside of the normal realm of how it was 20 years ago. We just don’t email each other anymore. We text each other and the texting that happens, the content of the texting is a gray area. There could be things within the text that’s small talk. You’re having a communication with your client and your client’s asking you, where can we meet for lunch? I’m running late or something like that. Those are things that I don’t worry about, but somewhere within that framework, sometimes something’s going to slip in that’s business related. You want to be able to capture that communication, so let’s have it captured. That’s the easiest thing. And then, if you can’t do it that way, establish a policy that helps you control these situations and makes them a little bit more manageable so that when there are situations like this, you can at least forward it to your email address and capture it. Those would be my best practices.

Candy Palugi:  I just had a couple of quick items to kind of tag along with the things that Dean said. One thing, just according to my experience and the things I’ve seen, and reading guidance, one of the things would be to ensure your policies are clear as to what is prohibited and what is allowed when it comes to electronic communications. I have seen policies and procedures that are very vague as to what is actually prohibited and what is actually allowed, which is very confusing to me. I know it’s confusing to the end user at the firm, so I would just ensure that it includes exactly what you’re prohibiting. If texts are prohibited, say that very clearly, that it is just absolutely prohibited. Also, as Dean mentioned about forwarding a message from your text device or wherever you receive a message that’s not firm approved, you state that in your policies and procedures.

That was some SEC guidance given at one time. State that guidance within the policies and procedures, so all of your employees see that in writing in the manual that they’re accepting every year, that if they do receive a communication from time to time, that they should forward that to an approved platform. The other thing I wanted to say is, if you know off-channel communications are happening at your firm, it has to be addressed. You cannot just ignore it and hang your hat on attestations and giving out the manual any longer. Doing so is like a ticking time bomb in the current regulatory environment for this issue particularly.

Dean Pelos:  I want to add one more thing too, if I could, to the off-channel communications. The other thing that, from a best practice point of view, that we can do as well is to make sure that we are training our employees properly and talking about off channel communications. In your annual compliance meetings, you can send out compliance reminders to your employees. And you can remind them, this is our policy, this is what we do. Add a couple of slides to an annual compliance meeting, talk about off channel communications, talk about what small talk is versus what is business related, and train your employees so they understand very clearly what the policy is.

Sarah Sutton:  Thank you, Dean and Candy. The next topic that we are going to cover is Marketing. In the past year and a half, two years, we’ve seen some significant changes, especially on the front of allowing testimonials and endorsements, that had previously been prohibited. One of the things that I have experienced is, a lot of firms, as they set up their policies and procedures, list that they’re using testimonials, endorsements, or that the firm is allowed to use testimonials and endorsements, but in fact are not yet using them. That’s fine; but making sure that you have adequate policies and procedures in place is key.  Keeping that door open and making sure that your staff, the employees, the advisors are all familiar with what the policies and procedures say is half the battle. But then, make sure that when you do decide to use testimonials and endorsements that you’re doing specific things. Make sure your ADV part one is updated showing that you are, in fact, using your testimonials and endorsements in your marketing documents and pieces.

The other is making sure that you have adequate disclosures on the pages or the marketing documents that include these testimonials and endorsements. One of the things to do is, when you are reviewing your marketing procedures as CCO, you should be reviewing your procedures at least once a year or whatever it says in your procedures. But the one thing to do is just to make sure that your marketing section is clear. As Candy mentioned earlier about the offline communications, make sure that the employees and the advisors know what they can and what they cannot do, training the advisors and the employees throughout the year. Use friendly reminders, making sure that they haven’t forgotten the changes that have been made. When you do update your procedures, make sure that you are sending them to all the employees to attest that they understand what’s changed.

One of the things regarding the testimonials and endorsements is to make sure that the disclosures that you’re using are adequate. One of the clients that I’ve worked with is going through an exam and one of the pieces of feedback that we received from the SEC was to have a more adequate definition in our policies and procedures about what a testimonial and an endorsement is. We actually went directly to the final rule release on the marketing advertising role and pulled that information and listed it as the disclosures that we would use when we had these types of situations in our marketing materials.

That being said, depending on how you are using this information in your marketing is also very important. You want to make sure the platform that you’re delivering it has room for the disclosures that you’re using, that it’s clear. If you have videos that you are including some sort of disclosure either at the beginning or the end, or that it’s on the webpage. Some platforms don’t allow for a lot of disclosure information, so just be careful with that. And of course, making sure that if you are using testimonials and endorsements that you’re adequately providing balanced information that you’ve received from these clients or previous clients or folks that are providing these endorsements on behalf of the firm.

Another topic to discuss is disclosures. So, we talked about the disclosures that you need for testimonials and endorsements, but disclosures themselves aren’t necessarily just a cookie cutter, like set it and forget it. You should always review the content of what the marketing piece is going over and what it’s covering to make sure that the disclosure is adequate. A lot of the time what we’ll see is a firm use the same disclosure for everything, and that type of cookie cutter practice won’t necessarily fly, especially when you’re going through an exam. And the SEC is looking through a sampling of your marketing materials. I always say review it and create the disclosure so it’s specific to the documentation. It’s a regular weekly newsletter that your firm is sending out, and it has neutral content. It’s not product specific, it’s not recommending anything in general, but it does talk about trading and tax efficient strategies.

You know, those types of things. Make sure that you have in your disclosure that the client or the prospect needs to consult their trusted tax advisor. A lot of the time you’ll see that this content is not included in the disclosures, and I think that’s something that a lot of us may not like to write necessarily, but at the same time, you want to make sure that it’s specific to the marketing piece that you’re putting out to clients and prospects. Another, I wouldn’t say really common mistake, but I think a common thing that can happen, and it’s an aha moment, is when you as a firm have a lot of marketing materials, say you have websites, you have social media posts on Facebook and LinkedIn, websites, blogs, you name it, emails. One of the things you want to do is as you’re creating this content and as compliance is reviewing and approving this content, is to make sure that you’re keeping an adequate and complete list of all this marketing material.

What the SEC is going to do is to come in and to ask for a list of all of the marketing that’s been sent out for a period of time. And what you don’t want to do is get stuck having to go through and write all of it down. They’re not necessarily going to want every single marketing document. They’re not going to want to necessarily see the actual post. They’re going to want to see the list and then they’re going to want to pull a random sample from that. That’s one thing that you don’t want to be caught with trying to pull together in that short time period when you start an exam for that initial request. You want to make sure you have adequate time to review everything. So doing that on an ongoing basis and not having to rush is always very helpful as well. Candy and Dean, do you have anything that you’d like to add regarding marketing and what you’ve seen with the firms that you’ve worked with?

Candy Palugi:  Sarah, I do have one quick thing I wanted to add that I’ve seen come up on an SEC exam. As you’ve mentioned, this is where we find a lot of the things that the SEC is really going to be a stickler about. For RIAs specifically, it’s important to make sure that when you are approving a marketing piece that you have required from the person who put the material together or someone in the firm, to provide you all of the substantiation documentation that’s required to support any statement of facts that’s been put into that advertising outside of just general knowledge like current interest rates, if we can go see that, things like that. But if it’s anything else, as far as if they’ve put some type of performance in there, or they’ve made any other kind of statement of facts, the new marketing rule for RIAs specifies that you must have substantiation, and I have had the SEC request the substantiation documentation to make sure that firms have it on hand to support that.

Sarah Sutton:  Thank you, Candy. Dean, do you have anything you wanted to add?

Dean Pelos:

The only thing else that I would add to this would be that you have people doing testimonials and endorsements, and they at some point in time want to prove to their existing client base as well as potential other investors out there that their firm is above the normal standard in terms of customer satisfaction. There are surveys that some of my clients do take with their clients, and as long as they’re talking about the results of the survey and they’re talking about those results in their entirety. In other words, they’re talking about all the good stuff, but they also have to talk about the negative things as well, the negative responses they may have gotten, and they’re willing to share that information either through the disclosure language, maybe at the bottom of the page, or to give you a link to their disclosures of the study that took place, that is sufficient, right? You want to make sure that you’re providing all the information. If you are in fact advertising testimonial, let’s say or some sort of survey that was taken, you want to make sure that that information is complete and not just focused on the positives.

Sarah Sutton:  Very true, very true. Thank you, Dean

Bob Mooney:  Thanks everyone for listening. If you’d like to learn more about our experts and how oyster can help your firm, visit our website at oysterllc.com. If you like what you heard today, follow us on whatever platform you listen to and give us a review. Reviews make it easier for people to find us. Have a great day.