Late last month, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 10-06 (“Notice”) which provides guidance to securities firms and brokers regarding the use of social networking websites for business purposes. The Notice was released to address numerous compliance questions regarding how the FINRA rules governing communications with the public apply to the use of social media websites by securities firms and their registered representatives.
Some Key Provisions
- Record-keeping Responsibilities: As stated in the Notice, “every firm that intends to communicate, or permit its associated persons to communicate, through social media sites must first ensure that it can retain records of those communications” as required by law. Such retention can be accomplished via varying methods and technologies, including the capturing of communications made by broker-dealers working off-site.
- Suitability Responsibilities: Recommendations of securities through social media websites do trigger responsibilities under NASD Rule 2310 to determine investor suitability. The Notice urges firms to adopt specific policies, namely, prohibiting recommendations through social media sites without approval of a registered principal, or in the alternative, maintaining a database of previously approved communications that can be used by registered representatives.
- Interactive Forums: FINRA deems the static content of a blog or social network website (e.g., profile, background and wall information) to be advertising and thus requires that a firm or registered representative sponsoring such a blog obtain registered principal approval prior to any posting. However, real-time interactive communications from a blog or social network page do not require such prior approval, yet they do require that the firm have in place adequate supervisory procedures under NASD Rule 3010 to comply with the content requirements of FINRA’s communications rule. Such procedures may include sampling and lexicon-based search methodologies for post-use review. The Notice reminds covered firms that Regulatory Notice 07-59 applies to communications over social network websites and requires supervision of an employee’s incoming, outgoing and internal electronic communications that are specifically implicated by FINRA rules or federal securities laws. These include communications between non-research and research departments on the content of research reports, any customer complaints and any communications regarding order errors or changes in account designations.
- Social Media Restrictions: Generally speaking, the Notice requires firms to adopt procedures to ensure that personnel using social media sites are adequately supervised and trained. In addition, the Notice states that firms should also consider policies to address personnel who fail to comply with procedures and present an unacceptable compliance risk.
- Third-Party Content: FINRA does not deem third-party posts as a firm’s public communication subject to approval, content and record-keeping requirements. However, the Notice states that third-party content might be ascribed to the firm if the firm is “entangled” with the preparation of the content, or has paid for it, or has “adopted” or implicitly or explicitly endorsed or approved the third-party content. The Notice also states that best practices suggest that firms establish processes to screen third-party content, either prominently disclaiming its involvement with the content or disclosing the firm’s policies regarding its stance on third-party posts.