FINRA on Social Media, Digital Communications
The Financial Industry Regulatory Authority (FINRA) took on social media in new guidance that attempts to apply existing rules governing communications to online networking platforms.
Regulatory Notice 17-18 offers guidance about how existing rules and guidance apply to communications made by firms and registered representatives via social media sites or using personal devices.
SEC Rule 17a-4(b)(4) requires firms to retain records of digital communications relating to their businesses. In Regulatory Notice 17-18, FINRA explains that whether a communication is subject to the retention requirement turns "on its content and not upon the type of device or technology used to transmit the communication." Communications made via social media may also be subject to the rules regarding suitability and supervision and other content requirements. Firms are responsible for training employees about the differences between business and nonbusiness communications and the measures required to ensure that business communications are retained, retrievable and supervised.
Generally, posts by third parties, such as customers, on social media sites do not constitute communications of the firm or its associated persons, but there are key exceptions that apply to this general rule. If the firm or an associated person has paid for or been involved in the preparation of the content (which FINRA defines as "entanglement") or explicitly or implicitly endorsed or approved the content (referred to as "adoption"), then the post would be considered a firm communication.
FINRA has adopted a similar approach to links. A firm is prohibited from linking to a third-party site that the firm knows or has reason to believe contains false or misleading content. Further, a firm cannot include a link on its website if there are any red flags indicating the linked site contains false or misleading content. As with posts, a firm can be responsible for content on a linked third-party site if the firm has adopted or become entangled with the content.
To flesh out these general rules, the notice illustrates the application of existing rules to a variety of situations involving social media.
Text messaging. When customers interact with firms and associated persons using text messaging, covered entities should retain records of the communications. "As with social media, every firm that intends to communicate, or permit its associated persons to communicate, with regard to its business through a text messaging app or chat service must first ensure that it can retain records of those communications as required by" the record retention rules, FINRA cautions.
Linking to or sharing content. FINRA cautions that firms can be responsible for content (such as an article or a video) posted by an independent third party if the firm shares or links to it, the regulator adding that the responsibility can extend even further. Whether a firm has adopted the linked content of an independent third-party website through the use of a link is fact-dependent, according to FINRA, with two factors critical to the analysis. First, whether the link is ongoing (meaning the link is continuously available to investors who visit the firm's site and the linked site could be updated or changed by the third party and investors would nonetheless be able to use the link), and second, whether the firm has influence or control over the content of the third-party site.
A firm can also be responsible for links to links: If a firm shares or links to content that in turn links to other content over which the firm has influence or control, the firm would then have adopted the other content.
Native advertising. While covered entities are permitted to use native advertising (i.e., content that bears a similarity to articles, news or other content that surrounds it online), any native advertising "must prominently disclose the firm's name, reflect accurately any relationship between the firm and any other entity or individual who is also named, and reflect whether mentioned products or services are offered by the firm." The usual requirements that firms' communications be fair, balanced and not misleading also apply.
Influencers. Firms that use "influencers" to promote their brands, products or services may become "entangled" and responsible for the resulting communication where the fact of the sponsorship is material information for consumers. Firms should "clearly identify as advertisements any communications that take the form of comments or posts by influencers and include the broker-dealer's name as well as any other information required for compliance," according to FINRA.
Testimonials and endorsements. Testimonials and endorsements are subject to a similar standard. FINRA does not consider the unsolicited opinions or comments of third parties posted on a social network to be communications by themselves. But if a firm or an associated person "likes" or shares an unsolicited comment, they have adopted it and subjected it to the communication rules, FINRA says, "including the prohibition on misleading or incomplete statements or claims, the testimonial requirements … and the supervision and record-keeping rules."
To comply with the required disclosures for a testimonial, firms may place the disclosure "in close proximity" to the testimonial or provide it through a clearly marked hyperlink accompanying the testimonial using language such as "important testimonial information," FINRA adds, provided that the testimonial is not false, misleading, exaggerated or promissory.
Certain corrections. Does a firm risk "adopting" a third party's content if it corrects information about the firm? Using a hypothetical directory of businesses that contained information about the firm (such as a misspelled name or inaccurate website address), FINRA advises that the correction of such information would not be subject to the communication rules, as they pertain to factual information.
To read Regulatory Notice 17-18, click here.
Why it matters
Regulatory Notice 17-18 should be required reading for covered entities engaging with customers on social media. FINRA emphasizes that whether a communication is subject to record-keeping requirements depends on the content and not the type of device or technology, explaining that answering the question of whether activity will be considered a communication is often fact-dependent.