Avoid a Category 5 Legal Storm: Safeguard Your Compliance Department

Yet again, FINRA proves why they are the backbone of the first line of defense in financial market regulation. Working in close coordination with FINRA, the SEC fortifies this defense by promoting transparency, protecting investors, and taking decisive enforcement actions to uphold market integrity.

On June 10th, 2024, TradeZero America received fines of $250,000 from FINRA due to significant lapses in their social media influencer program. This case underscores the critical need for firms to maintain robust compliance systems, particularly when navigating the complex world of digital marketing. 

What Happened? The FINRA Fine and Its Implications for TradeZero America

TradeZero America was penalized because their influencers posted content that was misleading, unbalanced, and violated FINRA’s communication rules. These posts, which described the firm as a “free web trading platform” without disclosing applicable fees or risks, led to significant regulatory scrutiny.

The influencers, with large followings, were paid to promote TradeZero America. However, their posts did not include necessary disclosures, and the firm failed to review or approve these communications before they went live. Additionally, TradeZero America did not maintain records of the influencers' posts, a key requirement under FINRA rules.

The firm’s major infractions included the lack of a supervisory system to oversee influencer communications. TradeZero America did not have a registered principal review and approve the influencers' videos or posts, nor did they enforce a system for tracking and archiving these communications. This failure to implement adequate supervision and compliance measures was a significant factor in the enforcement action taken by FINRA.

FINRA also found that TradeZero America provided inaccurate privacy notices to its customers. These notices failed to disclose that the firm might share nonpublic personal information with third parties for marketing purposes, a critical oversight that violated customer trust and regulatory standards.

In response to these findings, TradeZero America revised its supervisory system, including its Written Supervisory Procedures (WSPs), to ensure that all influencer communications are now reviewed and approved by a registered principal before being posted. Additionally, the firm has implemented procedures to preserve records of all communications, addressing the compliance gaps that led to the fine.

For more detailed information, you can visit FINRA's website and explore their Disciplinary Actions Online database.

See Finra's list of monthly disciplinary actions >>

How to Avoid Similar Fines: A Compliance Checklist

To avoid the costly and reputational damage that can result from non-compliance, financial firms should implement the following strategies, particularly when engaging with social media influencers:

1. Thoroughly Review Influencer Communications: All content produced by influencers should be reviewed and approved by a qualified compliance officer before it is published. This step ensures that all statements are accurate, balanced, and compliant with FINRA’s rules.
2. Include Mandatory Disclosures: Influencers must include appropriate risk disclosures and disclaimers in their posts. These disclosures should be clear, conspicuous, and consistent with regulatory requirements.
3. Implement a Dedicated Video Record-Keeping System: Establish a system specifically designed to record and preserve all influencer communications, particularly video content. This system will provide a comprehensive archive of what was communicated, helping to demonstrate compliance during audits or investigations.
4. Train Influencers on Compliance Requirements: Educate your influencers about the importance of compliance. They should be fully aware of the regulatory environment and the specific obligations they must meet when promoting financial services.
5. Ongoing Monitoring of Social Media Activity: Regularly monitor influencers’ social media activities to ensure continuous compliance. This proactive approach helps identify potential issues early and correct them before they escalate.
6. Maintain Detailed Records: Keep meticulous records of all communications, approvals, and training provided to influencers. This documentation is essential for demonstrating a firm’s commitment to compliance during any regulatory review.

The Importance of a Video Record-Keeping System

One of the key lessons from the TradeZero America case is the critical importance of maintaining a detailed and accurate record of influencer communications, especially video content. A dedicated video record-keeping system allows your compliance team to:

• Accurate Compliance Monitoring: By keeping exact records of what influencers say, firms can ensure that all communications meet regulatory standards.
• Regulatory Audits: A comprehensive video archive provides clear evidence of compliance, which is invaluable during regulatory investigations or audits.
• Proactive Issue Resolution: Having a detailed record allows compliance teams to spot and address potential issues early, before they become significant problems.

Investing in a robust video record-keeping system is not just a safeguard against regulatory fines—it’s a critical component of maintaining investor trust and protecting your firm’s reputation. In an era where digital marketing plays a pivotal role in business strategy, ensuring compliance with FINRA’s rules is more important than ever.

By following this checklist and prioritizing compliance, your firm can avoid the pitfalls that have ensnared others and navigate the complexities of social media marketing with confidence. Stay vigilant, stay compliant, and protect your firm from the devastating impact of a Category 5 legal storm.

How can RippleXn help you?

If this is you, talk to the team for a demonstration. 

Talk to us to get started