As the technologies and uses of online social media, such as Facebook and
Twitter, by regulated members of the financial services community continue to
grow and evolve, the regulations – and the regulators – struggle to keep up.
Recently, the Financial Industry Regulatory Authority (FINRA) issued a
Regulatory Notice (No. 10-06) providing guidance to firms and their
personnel regarding the use of these networks. Although the types of media may
change daily, FINRA’s position and rules do not – firms must find a way to apply
existing rules to any and all types of new media and networking activities. The
topics covered in this notice include:
Social Media Policies and Procedures: Firms must implement
policies and procedures reasonably designed to assure that their personnel
who contribute to social media sites for business purposes are properly
supervised, have the necessary training and background to engage in such
activities, and do not create undue risks to investors.
At a minimum, all firms must implement policies that (1) prohibit
associated persons from engaging in business communications on a social
media site that is not subject to the firm’s supervision; and (2) allow only
those associated persons who have received appropriate training about the
firm’s policies and procedures to engage in communications on these sites.
Types of Communications – Principal Approval: “Interactive
electronic forums” are included in the definition of “public appearance” in
NASD Rule 2210, and therefore, do not require prior principal approval.
FINRA has stated that unscripted participation by firm personnel in chat
rooms or online seminars, and real-time interactive communications on blogs
and other interactive sites such as Facebook, Twitter and LinkedIn would be
considered interactive electronic forums. However, static content would be
considered an “advertisement” under Rule 2210, and therefore, must be
approved by a principal prior to posting.
Both static and interactive content must still be supervised in a manner
reasonably designed to ensure that it does not violate the content
requirements of FINRA’s communications rules. As a general matter, firms
have flexibility in designing their supervisory structure, and may employ
risk-based principles to determine the extent and manner of review (e.g.,
prior-use vs. post-use review).
Suitability Standards: Any investment “recommendation” made
through a social media site triggers the suitability requirements. Special
concerns are raised if the recommendation is widely available to users of
the site or pertains to specific investment products. As a best practice,
FINRA suggests prohibiting all interactive electronic communications that
recommend a specific investment product unless they have been pre-approved
by a principal.
Recordkeeping Duties: A firm that intends to communicate, or
permit its associated persons to communicate, through social media sites
must ensure that the firm can retain and retrieve records of those
communications in accordance with SEC and FINRA rules.
Third-Party Posts: Note that FINRA does not usually treat posts by
customers or other third parties as the firm’s communications. However, in
some circumstances, a third-party post may potentially be attributable to
the firm if it (1) was involved itself in the preparation of the content, or
(2) endorsed or approved (explicitly or implicitly) the posted content.
Prominent disclosure that third-party posts neither reflect the views of the
firm, nor have been reviewed for completeness or accuracy, may help avoid
It should be noted that the notice only addresses the use by a firm or its
personnel of social media sites for business purposes. It is highly
recommended that a firm’s policies and procedures in this area also address
personal usage of these sites by firm personnel.
Helping our clients navigate the regulations and market challenges of online
business and electronic social media is a service provided by our integrated
Outsourcing practice team. In providing services to regulated financial
entities our team works closely with lawyers who practice regularly in our
Corporate Finance area. For further information on online businesses and
electronic communications policies and procedures please contact us.