FINRA, SEC Rules for Social Networking

That’s because they have not said a whole lot. However, it’s obvious regulators are at least aware of social networking; both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) send updates on Twitter.

From a broad standpoint, FINRA and the SEC place using social networking tools (such as Facebook, Twitter, and LinkedIn) under advertising and communication rules.

Earlier this year, FINRA offered some guidance to broker/dealers and their registered representatives in a podcast series about electronic communication, and one podcast dealt specifically with using social networking.

The SEC requires a little more interpretation for investment advisers, noted Dan Bernstein, director of professional services at MarketCounsel. The Commission has advertising rules under the Investment Advisers Act of 1940, but has not spoken to the issue of social networking specifically, he told PLANADVISER.com (see “Walking A Fine Line“). 

The SEC would take the position that advertising is advertising regardless of the medium, said Steve Scholes, partner at the law firm McDermott Will & Emery. The problem could arise in which an employee of a firm does not think communication is advertising but it is seen as advertising to an SEC enforcement lawyer.

FINRA Guidance

According to FINRA, all the regular rules when communicating with customers apply to communicating on social networks.

In its podcast, FINRA said if a social network profile is set up to be publically available and the registered representative is using it for any work-related matter, any communications on that page related to the firm’s business would be considered an advertisement, just like the firm’s public Web site.

But that doesn’t mean brokers with restricted profiles are out of the woods. FINRA said if a social network profile is restricted just to the rep’s specific contacts, communication about the business would then be considered sales literature, or materials distributed to a little or known group like customers or prospects.

FINRA said firms can either block access to social networking sites and ban reps from using them for business purposes, or firms can find a way to supervise this activity. For firms in the latter group, FINRA offered the following guidance about complying with regulations:

• Have a procedure. Supervisory procedures should be updated with steps to supervise social networking and ensure recordkeeping compliance, and annual training should reinforce this.
• Get approval. Ads and sales literature require written principal approval prior to use and prior to filing with FINRA, so firms need to ensure that supervisory procedure has a way to preapprove information posted on social networking regarding the firm’s business.
• Follow regular communication rules. Nothing can be exaggerated or misleading and all material facts must be disclosed. Reps must also clearly identify the name of broker/dealer they work for, make no forward-looking statements, and provide a sound basis for customers to evaluate any product or service being marketed. Some product communications, such as mutual funds, variable products, and exchange-traded funds (ETFs), are subject to filing with FINRA before they are posted.
• Keep a record. Like other advertising, postings on social networking sites must be maintained as part of the firm’s records for three years from their last use.
  

“So remember, if your firm lets your registered representatives use social networking sites, be sure you have a clearly articulated policy about how they can be used and what is acceptable in terms of their use along with the required approvals,” FINRA said in the podcast.

FINRA also directs brokers to broader Web communication rules: "Guide to the Internet for Registered Representatives."