Why Social Media Is Worth the Compliance Headaches

Chief compliance officers at banks, brokerages and other financial firms have a new job description in the postcrisis landscape: crystal ball readers.

"The key is that they have to be more risk identifiers than ever," says Barbara Stettner, managing partner at the international law firm of Allen & Overy. "The expectation is that CCOs will have to look around the corner for the organization—where is tech taking us, and what are the global risks the firm will be facing given the business line they're engaged in? They can't just be putting fires out anymore; now, it's about thinking ahead. I have this new tech, or a new generation that can't get off iPads, so how does that impact compliance and my role?"

Knowing the fundamentals of compliance will still remain core to the CCO's mission. But three other areas will increasingly demand the manager's attention in the next decade:

1. Technology Management—As the firm updates the technology it uses, the CCO will need to understand it well enough to ensure that it is being used in an appropriate and compliant manner.
2. Cybersecurity—As firms become more reliant on online resources to conduct their activities, the challenge of ensuring that its data is secure will become even more daunting.
3. New Investment Products and Markets—The almost limitless ingenuity of capital markets has created new financing vehicles. At the same time, investment markets grow increasingly internationalized—and drawing in nations with underdeveloped legal systems and infrastructure. CCOs must assess the new risks and ensure the integrity of the valuation process for such assets and the documentation of investment due diligence.

Social media platforms are evolving along with technology, and that can complicate the life of a CCO. The old marketing and advertising rules won't change much, but the forums—Twitter, LinkedIn, and so on—will continue to develop and pose significant challenges to the industry.
Compliance officers won't be able to rest on their laurels in such an environment.

"CCOs must become aware of how the younger investment managers use technology in the normal course of a business," says Tina Petruzziello, founder and compliance principal at Boston Compliance Associates. "Identifying the risks and potential compliance issues will force the CCOs to continuously learn about and keep abreast of new ways of communicating with the public. The ability to use new technology and social media platforms must be incorporated in a robust compliance program."

Her colleague, David Rozenson, counsel and senior consultant at Boston Compliance, sees an inherent compliance conflict looming.

"As the social media platforms become more complex, the best approach for CCOs may be to keep it simple—to establish basic principles and prohibitions regarding employees' use of social media and stressing that they apply to all communications outside of the work environment," he says.

But that solution can hold firms back as others embrace and leverage social media while remaining compliant.

Compliance training for employees must explain the specific risks associated with the careless use of social and other communications media, Rozenson adds. It helps to offer samples of both appropriate posts and ways to respond to social contacts from current and prospective clients.

Don't look for compliance costs to fall in this environment. Regulators are expecting more from financial professionals in the areas of surveillance and recordkeeping, and the technology that firms will need to deploy isn't cheap.

Trade-offs result from the tension.

"So as technology increases, that could reduce the overall costs, but you'll have to make an investment in other areas like hiring new staff with diverse skills -- maybe coders, or ex-FBI working on counterterrorism, or ensuring you have cybersecurity protections in place," says Melissa Callison, vice president, communications compliance at Charles Schwab. Expect more pressure to find return on investment on the higher mechanisms required for compliance, and more struggles between CCOs and CEOs on the subject.

Petruzziello says that more regulations and guidance around social media will inevitably boost costs. There is no way around that without restricting use of social media by employees.

"The downside of such restriction is missed exposure and opportunities," she says. "Balancing risks and costs remains the old but new problem for CCOs and their investment managers."

Also driving the pressure on the compliance bottom line: regulatory risk from outside the American borders. Firms aren't staying in one nation anymore. And some countries in Asia and Europe are developing an American taste for litigation, perhaps following the examples of attorneys general in many U.S. states.

"Every AG knows that if they find a scandal in the industry, it's a trip to the governor's mansion," Stettner says. "So there's a lot of pressure on the regulators to not sit back on their heels."

That's not to say that financial services workers should avoid social media in their practices, however-it's still a basic tool that the next generation uses to communicate.

Unfortunately, the CCO's struggle within the regulatory landscape is likely to continue. Regulators tend to react to issues as they emerge in the financial industry, rather than set proactive parameters. CCOs grapple with the nuts and bolts of compliance matters every day and can see pitfalls coming more quickly. But it's hard to enforce a best practice in an industry without a mandate from government overseers.

"Even if everyone wants to 'do the right thing' when the revenue upside is seemingly unlimited, the compliance function has a difficult task ahead," Petruzziello says.

So as the industry changes, expect the demands on the CCO to grow in kind. The job is likely to see broader responsibilities -- more matters subject to compliance, and regulators seeking to have an individual in the organization who can be held accountable. The job is likely to have more supervisory tasks, and CCOs will need to be savvy practitioners of C-suite politics as they rub elbows with the top brass. The goal is to be respected and to influence a culture of compliance at the firm.

Excerpted with permission of the publisher, Wiley, from The Socially Savvy Advisor + Website: Compliant Social Media for the Financial Industry by Jennifer Openshaw. Copyright (c) 2014 by Jennifer Openshaw. All rights reserved. The views expressed here are those of the author and not representative of the Financial Women's Association.