On January 25, 2010, FINRA issued Regulatory Notice 10-06 , which provides guidance on how FINRA rules governing communications with the public apply to the use of social media Web sites by member firms and their registered representatives for business purposes.

The Notice addresses the supervisory, suitability, and recordkeeping responsibilities of firms that may arise through the use of blogs and social networking Web sites such as Facebook, Twitter, and LinkedIn. The Notice also addresses issues relating to interactive electronic forums and third-party posts. The Notice makes the following points, among others:  

Suitability  

  • Recommendations made through a social media Web site trigger the suitability requirements of NASD Rule 2310.  
  • Whether a "recommendation" is made for purposes of Rule 2310 will depend on the facts and circumstances of the communication.  
  • As a best practice, firms 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.  
  • Firms alternatively might consider prohibiting communications that recommend a specific investment product unless the communication conforms to a pre-approved template and the specific recommendation has been approved by a registered principal. 
  • Firms also should consider adopting policies and procedures governing communications that promote specific investment products, whether or not a recommendation is being made.  

Supervision  

  • Firms must supervise interactive electronic communications under NASD Rule 3010 in a manner reasonably designed to ensure that they do not violate the content requirements of FINRA's communications rules.
  • Firms may employ risk-based principles to determine the extent to which the review of incoming, outgoing, and internal electronic communications is necessary for the proper supervision of their business, as discussed in Regulatory Notice 07-59.  
  • Firms must adopt policies and procedures reasonably designed to ensure that associated persons who participate in social media Web sites for business purposes are appropriately supervised, have the necessary training and background to engage in such activities, and do not present undue risks to investors.  
  • Firms must have a general policy prohibiting any associated person from engaging in business communications in a social media Web site that is not subject to the firm's supervision.  

Recordkeeping  

  • Broker-dealers are required to retain records of communications made through social media Web sites that relate to their business.  
  • FINRA does not endorse any particular recordkeeping technology and it not certain that adequate technology currently exists.  

Interactive Electronic Forums

  • Unscripted participation in an interactive electronic forum, such as a chat room or online seminar, is covered by the definition of "public appearance" in NASD Rule 2210.  
  • Rule 2210 does not require prior principal approval of extemporaneous remarks made in public appearances, but the supervisory and content requirements of FINRA's communications rule apply.  
  • A "blog" may constitute an "interactive electronic forum" for purposes of Rule 2210 depending on how it is constructed.  
  • FINRA considers "static" postings on blogs to constitute "advertisements" under Rule 2210 requiring prior principal approval.  
  • FINRA considers blogs that allow "real-time" interactive communications to be an interactive electronic forum that does not require prior principal approval, but is subject to supervisory requirements.  
  • Prior principal approval is required of all static content posted on social networking Web sites by a firm or registered representative, including profile, background, or "wall" information.

Third-Party Posts  

  • Posts by customers or other third parties on a social media Web site established by a firm or its personnel generally are not required to be treated as the firm's communication with the public subject to Rule 2210.  
  • In certain circumstances, third-party posts may become attributable to the firm depending on whether it has (1) involved itself in the preparation of the content (the "entanglement" theory) or (2) explicitly or implicitly endorsed or approved the content (the "adoption" theory).
  • A disclaimer that third-party posts do not reflect the views of the firm, and have not been reviewed by the firm, would be fact or circumstance that FINRA would consider in analyzing whether the firm had adopted or become entangled with a posting.
  • Best practices include establishing appropriate usage guidelines for customers and other third parties that are permitted to post on firmsponsored Web sites; establishing processes for screening third-party content based on the expected usage and frequency of third-party posts; and disclosing firm policies regarding its responsibility for thirdparty posts.

Commentary

The Notice takes a common sense approach in applying existing FINRA requirements to the use of social media Web sites. Additional questions are likely to arise as these social media Web sites continue to evolve, as their usage increases, and as the line between personal and business purposes blurs.

Regarding FINRA's guidance above on recommendations, presumably Rule 2821 in addition to Rule 2310 would apply to a recommendation of a deferred variable annuity made through a social media Web site.

At a minimum, the Notice puts firms on notice to review and, if necessary, revise written supervisory procedures and compliance procedures to address the use, supervision, and record retention of communications made through social media Web sites.

FINRA Webinar

FINRA is sponsoring a webinar for members and non-members to address Regulatory Notice 10-06 and related compliance considerations. The webinar is scheduled for February 3, 2010, from 1:30 p.m. to 2:30 p.m. (ET). Click here for details.