Securities Law Blog

In an effort to create more clarity for financial services firms surrounding the use of social media networks, the Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice on January 25, 2010 entitled “Guidance on Blogs and Social Networking Web Sites”.

While the industry regulator does not codify any direct actions that need to be taken by financial firms, they do make several suggestions that could protect a firm’s liability when communicating over the internet. Organized in a Question and Answer format, FINRA sheds light on potential compliance issues and offers possible policies and procedures that firms could adapt in order to deal with supervisory and recordkeeping responsibilities.

The main message for firms throughout the Notice seems to be, if you plan on using it, you better be able to supervise it, we don’t care how or what you use to do it but it better be done and it better be done right.

Some key points in the Notice:

*If a firm communicates or allows its employees to communicate through social media sites, it is the firm’s responsibility to keep records of communications that relate to “business as such”. Firms need to ensure that associated personnel using social media sites for business purposes are adequately supervised, have necessary training in such activities, and do not present undue risk to investors.

*Requirements set forth by Federal securities laws and FINRA rules may be triggered when registered representative’s communications include recommending specific investment products. Additional disclosures should be made available to the customer to prevent any skepticism that a firm’s associate was misleading in anyway. FINRA suggests that firms should prohibit all interactive electronic communications that recommend a specific product unless a registered principal has previously approved the content.

*For static information, which could include profile, background or wall information, on social networking sites that are established by the firm or a registered representative, a registered principal of the firm must approve all information before it is posted. It is advised that these approvals also be documented.

*For interactive electronic communication, it is not required to have a registered principal’s approval, but it still must be supervised by the firm. FINRA suggests that firms adopt supervisory procedures similar to those used for electronic correspondence. It is up to the firm to develop policies that address communication liability and ensure that they are “reasonably designed to ensure that interactive electronic communications do not violate FINRA or SEC rules”.

*It is also the firm’s responsibility to prohibit personnel from engaging in business communication on social media sites that are not subject to firm’s supervision, and to take disciplinary action if firm policies are violated.

The overall goal of the Notice is to protect investors from misleading representations and allow firms to take part in the benefits of social media while effectively and appropriately supervising their associated persons’ involvement with these sites.