FINRA 10-06 social media_issues


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Earlier this year, FINRA issued its Regulatory Notice 10-06, giving its members some guidance on their use of social media. In the months that have passed since the release of the Notice, the sentiment surrounding its guidance remains rather muted. In short, none of the guidance is earth shattering and in fact is quite underwhelming.

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FINRA 10-06 social media_issues

  1. 1. FINRA & SOCIAL MEDIA This article has been provided courtesy of Earlier this year, FINRA issued its Regulatory Notice 10-06, giving its members some guidance on their use of social media. In the months that have passed since the release of the Notice, the sentiment surrounding its guidance remains rather muted. In short, none of the guidance is earth shattering and in fact is quite underwhelming. However, broker dealers are rightly concerned about the risks and benefits of allowing their advisors to participate in social media. According to Socialware, Inc., there are at least 4 million registered LinkedIn users who work in the financial services industry. With numbers like that, broker dealers should be paying attention. To help, we have provided some distillation of both Notice 10-06 and the subsequent webinar hosted by FINRA that covered in more detail the issues raised by social media.  There are 4 While this distillation may be helpful, it is not intended to be a final million LinkedIn pronouncement on the way these issues may be handled by FINRA. It users in the must always be at the front of any broker dealer’s mind that with the release of Notice 10-06, FINRA makes it crystal clear that all internet Financial communication – regardless of the specific media – is treated the same as Services in person or written communication. Industry Recordkeeping Responsibilities SEC Rules 17a-3 and 17a-4 and NASD Rule 3110 apply and firms must retain records of communications related to their “business as such.” Technology is being developed by industry vendors, but each firm must determine whether any particular technology provides the necessary retention and retrieval functions to comply. Suitability Responsibilities As one would expect, the standard suitability rules apply to recommendations made through social media websites. NASD Notice to Members 01-23 provides guidance regarding online suitability. Additionally, recommendations of specific products are subject to a firm’s existing rules which include required disclosures. Firms can and should consider prohibiting interactive electronic communications that recommend specific products. At its best, social media is a networking tool rather than a sales tool. As a result, restricting representatives from making recommendations through social media should not have a drastic impact on the value its use may present. Types of Interactive Electronic Forms Chat rooms, online seminars, and other such interactive, electronic forums may be a concern. Participation in such forums is considered a public appearance as it is defined in FINRA Rule 2210.
  2. 2. Such appearances must be supervised, but do not require prior, written approval of a registered principal. Less clear is how content posted on social media websites will be treated; it may be deemed a public appearance but, but such determination will depend on the particular facts and circumstances. Blogs Many financial advisors – particularly in the RIA community – maintain blogs. For regulatory purposes, it is important to know that static postings are considered advertisements. However, participation in a blog that occurs in more real-time (e.g. via a comment function) would be considered a public appearance, as the blog is functioning as an interactive, electronic forum. One important item of note is that the frequency of content updates to static postings does not play a role in distinguishing a between advertising and a public appearance. Social Networking Sites As with blogs, static information on social networking site is considered advertisement. This would include things like profiles, backgrounds, or “wall” information. Again like blogs, interactive communications would be considered a public appearance. Interestingly, it appears that the amount of time an interactive communication is posted does not automatically make the content static, and thus an advertisement. For example, a real- time status comment, or tweet would still be considered a public appearance even if it were visible for a long period of time. Different rules apply when a social networking site enable rep-to-rep or rep-to-BD communication. Such communication is governed by FINRA Rule 2211, which defines institutional communications and offers more flexible compliance guidelines. Supervision of Social Media Sites When it comes to supervision of social media sites, the general message is that it must be done, but the extent and method is largely up to each individual broker dealer. However, the procedures for supervising such activity should be similar to those outlined for electronic correspondence in Regulatory Notice 07-59. Third-Party Posts With regard to third-party posts online, the issues are entanglement and endorsement. Generally, such posts are not subject to FINRA’s advertising rules. However, if a post is in any way attributable to the firm (e.g. due to participation in the preparation of the content) or if the firm or rep may be deemed to endorse or approve of the content it is a different story. Specifically, “Liking,” “Voting For,” or “Re-Tweeting” any third-party post would be considered an endorsement. Additionally, if a representative solicits comments or feedback on content from a third-party, FINRA would consider this equal to entanglements.
  3. 3. Many broker dealers currently find social media to be too large a hazard, and therefore simply restrict access to it entirely. In fact, a recent survey of financial service professionals by LederMark Communications found that fully 39% of the participants said that company policy entirely precludes their participation in social media. Additionally, 58% of financial service professionals said that compliance concerns are a major impediment to their embrace of social media for their business. At the same time, the number of seniors who actively use the Internet has increased more than 55% over the last five years, with 17.5 million tracked at the end of 2009. There is clearly opportunity in social media, and the tide does not appear to be receding. However, prudent broker dealers will tread cautiously as the various kinks are worked out. As social media gains greater acceptance within the financial community, compliance and supervision solutions will be developed and implemented, much as they have been in the past when  17.5 million new technologies presented both challenges and opportunities. The fax, seniors email, and websites have all posed similar challenges. Social media will likely follow a similar path. regularly use the Internet c/o Adam Verchinski View for original research and perspectives on the asset management / investment management industry as well as highlights of industry trends and news. Adam Verchinski is the Marketing and Client Communications, IT Business Analysis Manager, at a leading global investment management firm that offers research and diversified investment services to institutional clients, individuals and private clients in major markets around the world. Adam's background includes over 11 years as a technology and management consultant working exclusively in financial services, on both the buy and sell sides. You can connect with Adam via his website, as well as the major social media networks. On Twitter at: as well as LinkedIn: