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Regulatory Notice

FINRA/SEC Social Media Compliance

As online social networks and social media become more pervasive and frequently used methods of business communication, M&A professionals must know and understand the ins and outs of using these sites while remaining compliant with SEC and FINRA regulations and guidelines.

Recently, we compiled a summary of FINRA’s Regulatory Notice 10-06. Released in January 2010, the notice provides guidance on the use of blogs and social networking sites by M&A professionals. To ensure compliance, Registered Representatives should develop their compliance policies and procedures with support from legal counsel and firms specializing in FINRA/SEC compliance solutions, as the consequences of violating the guidelines do not distinguish between communication via the Internet and written or in-person communication.

Chad Bockius, CEO of Socialware, a company providing software-based tools to help financial services companies execute successful social media strategies in compliance with regulatory requirements, believes that “social networks are ideal for building valued relationships.” He says, “Due to the continuing growth of Facebook, LinkedIn and Twitter, there are clear opportunities for financial services professionals to use social media in order to identify and foster relationships that can deliver business results. Understanding the regulatory guidelines, building a strategy including sound technology, and measuring effectiveness are key steps to effectively using social media.”

According to FINRA:

  • Publicly available web sites (ex: Twitter) are considered advertisements
  • An email or instant message is considered sales literature if it is sent to 25 or more prospective customers
  • An email or instant message is considered correspondence if it is sent to a single customer, an unlimited number of existing retail customers, and/or fewer than 25 prospective retail customers (firm-wide) within a 30-day period
  • Password-protected web sites (ex: Facebook or LinkedIn) are considered sales literature
  • Chat room discussions (ex: Facebook discussions, LinkedIn Q&A) are considered public appearances

1. Recordkeeping Responsibilities
“Every firm that intends to communicate, or permit its associated persons to communicate, through social media sites must first ensure that it can retain records of those communications as required by Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 and NASD Rule 3110. SEC and FINRA rules require that for record retention purposes, the content of the communication is determinative and a broker-dealer must retain those electronic communications that relate to its “business as such.”

Posting updates to LinkedIn or Facebook is considered sales literature, and as a result, you are required to obtain prior approval from the registered principal at the firm and maintain records of your social media activity. There are a number of solutions available to capture your social media activity such as Socialware, a compliance solution that will help you implement and enforce corporate and regulatory policies for social networking sites.

2. Recommendations/Testimonials
“It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act for any investment adviser registered or required to be registered under section 203 of the Act, directly or indirectly, to publish, circulate, or distribute any advertisement: (1) Which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser”

LinkedIn presents a risk, as colleagues are able to write recommendations of you on the site. The solution is fairly simple: LinkedIn provides the ability to turn off recommendations from your profile. Be sure you create a firm-wide policy requiring that all Registered Representatives and employees subject to this rule turn off recommendations on their profiles.

3. Interactive Electronic Forums/Advertisements
“The definition of “public appearance” in NASD Rule 2210 includes unscripted participation in an interactive electronic forum such as a chat room or online seminar. Rule 2210 does not require firms to have a registered principal approve in advance the extemporaneous remarks of personnel who participate in public appearances. However, these interactive electronic forums are subject to other supervisory requirements and to the content requirements of FINRA’s communications rule.”

Social media sites and blogs are categorized as static or dynamic with each treated differently by FINRA. A static blog is considered an “advertisement,” while a dynamic blog with real-time interactive communication is considered an interactive electronic forum, which does not require prior principal approval.

Most social networks will be treated as both static and interactive. For Facebook, LinkedIn, and Twitter, any static content (public profile, wall post, tweet, or status update) would be an advertisement, where non-static, real time communications (groups, public forums, or chat) are considered an interactive electronic forum, which does not require prior principal approval. While interactive electronic forum communication does not require prior principal approval, firms are required to monitor these communications.

4. Supervision of Social Media Sites
“Firms must adopt policies and procedures reasonably designed to ensure that their associated persons who participate in social media sites for business purposes are appropriately supervised, have the necessary training and background to engage in such activities, and do not present undue risks to investors. Firms must have a general policy prohibiting any associated person from engaging in business communications in a social media site that is not subject to the firm’s supervision.”

Be conscious that many social media sites offer multiple ways to communicate: status updates, messaging, groups, instant messaging, etc. You must address each type of communication and provide guidance on what can and cannot be communicated. FINRA recommends that as a best practice, do not provide specific investment advice through social media.

5. Third-Party Content
“As a general matter, FINRA does not treat posts by customers or other third parties as the firm’s communication with the public subject to Rule 2210. Thus, the prior principal approval, content and filing requirements of Rule 2210 do not apply to these posts.

Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content.”

It is not specified, but likely, that retweeting, liking, and sharing content may be considered an endorsement of that content as per the “adoption theory.” Be sure to include in your profile that third-party posts do not reflect the views of your firm and have not been reviewed by the firm for completeness or accuracy.

Do these guidelines mean you can’t use LinkedIn, Twitter or Facebook? Absolutely not. All of these can be used to advance your success as an M&A professional. With the appropriate policies and tools in place, you will be able to reap the rewards of social networking technology.

This article is provided by Axial Inc. and its affiliates for educational and informational purposes only and is not intended to constitute, and should not be construed as, legal or business advice. This article is a summary that we believe may be of interest to you for general information. It is not a full analysis of the matters presented and should not be relied upon. Prior to acting upon any information set forth in this article or related to this article, you should consult independent legal counsel.

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