On October 14, 2014, the Financial Industry Regulatory Authority (FINRA) fined a securities analyst $15,000 for "tweeting" opinions about securities without revealing that he owned them. The action – one of roughly 10 involving social media postings over the past several years – highlights the need for research analysts, brokers, and others in the securities industry to implement appropriate policies and procedures for the use of social media networks and any communications to be made available thereon.1
According to FINRA, the registered analyst's twitter posts dating between 2009 and 2011 violated National Association of Securities Dealers (NASD) Rules 2711(h)(1)(A) and 2210(d)(1)(A), FINRA Rule 2010, and NASD Interpretive Memorandum 2210-1.2 Broadly speaking, these rules (and related Securities and Exchange Commission [SEC] requirements) treat social media similar to other business-related communications through other media. The FINRA rules, for example, impose the following requirements on broker communications with the public through social media:
- Supervision – Firms must supervise social media communications (as noted below) under FINRA Rule 2210 and NASD Rule 3010.
- Suitability – Under FINRA Rule 2111, firms must confirm that every "recommendation" for a security that is communicated through social media is suitable for every investor to whom it is made.
- Recordkeeping – Firms that communicate through social media must keep records of those communications under FINRA Rule 4510 and Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934.
FINRA has been relatively responsive in providing guidance to the industry in this area; in 1999 and 2003, FINRA issued guidance related to participation in electronic chat rooms and other interactive message forums. Then, in 2010, FINRA issued Regulatory Notice 10-06, "Social Media Web Sites," to provide detailed guidance on complying with FINRA's communication rules when using social media sites or platforms. (The SEC, for its part, has also issued guidance on social media for registered investment advisers [RIAs]. The RIA requirements and SEC guidance are similar in many respects to FINRA's requirements for broker-dealers).
One of the challenges with social media is that most networks offer both static displayed content (e.g., a blog posting) and interactive communication features (e.g., real time communications form third-party end users). The FINRA rules treat these two functions differently. For static content, a registered principal of the firm must approve the communication before it is posted on a social networking site. For interactive communications, no prior approval is required, although "firms must supervise these interactive electronic communications under NASD Rule 3010 in a manner reasonable designed to ensure that they do not violate the content requirements of FINRA's communication rules."3 Finally, for third-party posts, FINRA does not attribute such posts to a firm unless the firm or its personnel either contributed to the posting (or assisted in its preparation) or adopted or endorsed its content. This requirement to supervise can create a number of challenges for firms given that social media networks are designed to allow for third-party communications.
Recommended Best Practices
If your firm is interested in establishing a social media presence, a prerequisite is the implementation of an appropriate social media policy and compliance program. In most cases, a firm will already have developed a comprehensive policy governing business-related communications that can be updated to include provisions that address some of the unique characteristics of communicating through social media networks. However, such a program must be tailored to your organization's size, business, and culture; mindful of FINRA's rules and guidance; and focused on protecting your firm's brand and reputation. To the extent your firm also has affiliated RIAs, your policy should be drafted to comply with applicable SEC requirements as well.4
The following 10 suggested best practices for social media will facilitate effective compliance with FINRA (and other) rules:5
- Develop and implement a risk management program for social media communication that includes appropriate reporting to your firm's board of directors or senior management to enable evaluation of the effectiveness of the social media program.
- Establish a social media policy that addresses the ownership of and use of social media accounts (e.g., accounts should be in the name of the firm), provides notice to employees that such accounts are the property of the company, establishes usage guidelines and content standards, and complies with any applicable social media password protection laws.
- Confirm that your social media policy and procedures address all of your obligations under applicable FINRA and SEC rules and regulations, including:
- Supervision (requiring registered principals to review and approve, prior to use, any static communications, and for interactive forums, using sampling and lexicon-based search methodologies to supervise communications);
- Suitability (as with other communications, make sure that social media posts comply with FINRA's suitability requirements); and
- Recordkeeping (preserve social media records for a period of not less than three years, the first two in an easily accessible place).6
- Educate and periodically train employees on the social media policy.
- Establish a process for selecting and managing third-party relationships related to social media.
- With a take-down policy, manage information posted to social media sites by third parties to ensure compliance with applicable laws and regulations.
- Ensure that the social media policy otherwise addresses the protection of trade secrets, intellectual property, and confidential information, including the appropriate use of firm trademarks and copyrights in connection with online activities.
- Consider privacy and data security risks to minimize potential exposure to liability related to personal data collection, use, retention, and maintenance. This may require review of state privacy laws or general industry self-regulation guidelines.
- Incorporate provisions recognizing corporate ownership of social media sites or pages into employment agreements, confidentiality agreements, and restrictive covenant agreements.
- Maintain an audit function to ensure ongoing compliance with internal policies and all applicable laws.
Although social media has become mainstream in recent years, it still presents significant compliance, legal, and reputational risks for broker-dealers and others in the securities industry. To protect your firm and customers or clients, make sure that you have appropriate policies and procedures in place before allowing your employees to tweet, post, or share information through social media.