The Financial Industry Regulatory Authority, Inc. (FINRA) recently issued Regulatory Notice 10-06, “Social Media Web Sites, Guidance on Blogs and Social Networking Web Sites,” (the Notice), which provides guidance to broker-dealers concerning communications with the public on social media web sites, including blogs and social networking sites such as Facebook, Twitter and LinkedIn.

Although FINRA has previously provided guidance concerning applications of the communications rules to interactive web sites, in response to recurring questions concerning the applicability of FINRA rules to the use of social media sites, and in recognition that social media sites could serve legitimate business functions and that their use will likely increase over time, FINRA organized the Social Networking Task Force (the Task Force). The Task Force is composed of FINRA staff and industry representatives. With input from the Task Force, FINRA issued the Notice with the goal of ensuring that investors are protected from false or misleading claims and representations made on social media sites and that broker-dealers effectively and appropriately supervise their associated persons’ participation on these sites.

The guidance in the Notice is presented in a “question and answer” format, and is generally consistent with previous FINRA guidance. The topics discussed include:

  • Recordkeeping Responsibilities;
  • Suitability Responsibilities;
  • Types of Interactive Electronic Forums;
  • Supervision of Social Media Sites; and
  • Third-Party Posts.

As a general matter, FINRA noted that although the guidance in the Notice was intended to be useful when establishing broker-dealer policies and procedures, each broker-dealer is required to develop policies and procedures that are best designed to ensure that it complies with all applicable requirements. The guidance provided in the Notice should be considered in the context of the broker-dealer’s business and its compliance and supervisory programs.

The guidance included in the Notice is summarized below. In addition to publishing the
Notice, FINRA is hosting a webinar on compliance considerations for social networking
sites on March 17, 2010. More information is available at www.finra.org/webinars.

Recordkeeping Responsibilities

FINRA clarified that broker-dealers who intend to communicate, or permit their associated
persons to communicate, through social media sites must first ensure that they can
retain records of those communications as required by Rules 17a-3 and 17a-4 under the
Securities Exchange Act of 1934 (the Exchange Act) and NASD Rule 3110. These rules
require that the content of a communication is determinative of whether it relates to a
broker-dealer’s “business as such,” and, therefore, whether a record of the communication
is required to be made and kept.

FINRA acknowledged that complying with the recordkeeping responsibilities could present
practical difficulties and that the technology required for compliance might not currently
exist, but noted that technology providers are developing systems that are intended
to enable broker-dealers to retain records of communications made through social
media sites. FINRA stated that each firm is responsible for determining for itself whether
a system achieves its intended objectives.

Suitability Responsibilities

Prior to reviewing suitability issues specific to social media sites, FINRA reiterated the
requirements of NASD Rule 2310 regarding suitability determinations, directing brokerdealers
to previous guidance regarding online recommendations and suitability. FINRA
noted that communications made through social media sites may be widely available, and
that broker-dealer suitability requirements must be satisfied for every investor to whom a
recommendation is made. As a general matter, FINRA reminded firms of their obligation
to adopt policies and procedures reasonably designed to address communications that
recommend specific investment products.

FINRA acknowledged that supervisory procedures regarding social media site communications
may present greater challenges than other types of communications, and that
as a best practice broker-dealers should consider prohibiting all interactive electronic
communications that recommend a specific investment product (and any link to such a
recommendation) unless a registered principal has previously approved the content.

As an alternative to such a prohibition, FINRA noted that broker-dealers could maintain
databases of previously approved communications, provide their personnel with routine
access to these templates and permit recommendations to be made only through use of
these templates.

Lastly, FINRA indicated that firms should consider adopting policies and procedures
governing communications that promote specific investment products, even if these communications
might not constitute a “recommendation” for purposes of the suitability rule
or otherwise.
A copy of the Notice is available at http://www.finra.org/web/groups/industry/@ip/@
reg/@notice/documents/notices/p120779.pdf.