FINRA reminds broker-dealers to follow the rules in social media

WASHINGTON: FINRA has issued social networking guidance for securities firms and brokers, following demand from the industry.

WASHINGTON: FINRA has issued social networking guidance for securities firms and brokers, following demand from the industry. The Financial Industry Regulatory Authority (FINRA), a non-governmental securities firm regulator, created a social networking task force last fall to clarify its rules as they apply to blogs and the social Web.

The recommendations include best practices for a variety of scenarios, such as a broker's Facebook page, to keep firms from violating financial regulations while being able to take advantage of the popularity of social networking to engage customers. The guidance also aims to protect investors from fraudulent information, said Joe Price, SVP of advertising regulation/corporate financing at FINRA.

“I think there's a tremendous amount of interest in this topic, and we're trying to be proactive so these sites can be used in a way that complies with the rules,” he added.

The agency issued the Regulatory Notice to its members, and released it on its Web site January 25. It plans to host two webinars to further explain the guidelines on February 3 and March 17.

The guidelines stress the need for firms to be able to monitor and archive all communications related to broker-dealers' business on social media sites just as they are already required to do in other communications, such as in-person and by telephone. It also says the members are not liable for third-party posts, such as a comment to a Facebook wall, unless the organization paid for it or was otherwise involved in its creation, or responded in the affirmative to it. FINRA also affirmed that if recommendations are made through social media, its suitability rule does in fact apply.

Other scenarios outlined in the guidelines include requiring principal approval for static elements of social media sites, such as a logo on a blog or fan page, and the best way to monitor a site with real-time communications. FINRA stressed that each firm should develop its own internal procedures in order to satisfy all applicable compliance issues.

“This whole social media stuff hits FINRA's hot button issues – the suitability issue and the recordkeeping issue,” noted Dan Berick, a partner at Squire Sanders law firm where he focuses on securities and corporate finance. “They've been trying to address this. They've had prior guidance on say, participating in chat rooms. Here, they're trying to get their membership firms to focus on what their registered reps are doing on social media.”

Overall, the guidelines seek to remind broker-dealers that the same rules that apply in other communications must be adhered to in social media as well.

Jeff Morgan, president and CEO of theNational Investor Relations Institute (NIRI) praised FINRA's action, noting that the specific regulatory rules that bind brokers make it necessary for a set of industry-specific guidelines.

“When you're using social media, there needs to be an understanding that you're still representing the company,” he added.

The technical issue of how to comply with the rules, though, is a trickier one. In FINRA's own statement on the guidelines, it says, “FINRA does not endorse any particular technology to keep such records, nor are we certain that adequate technology currently exists.”

Software suppliers once helped regulated companies focus on simply capturing and archiving e-mail, but now vendors like Oregon-based Smarsh offer social media archiving for Twitter, Facebook, and IM.

Newcomer, SocialWare allows companies to build custom platforms in order to participate in social media while remaining in compliance with industry-specific regulation, according to Chad Bockius, VP of marketing and product strategy at SocialWare. For example, its Risk Manager product provides a sort of intermediary platform for employers to implement various controls on the use of social networking sites from the office, including tracking conversations, archiving, and pre-approval of postings.

Bockius said that in the past he has heard of clients copying and pasting single tweets and taking screengrabs of Facebook pages to comply with the rules.

“Prior to this notice, firms were left to interpret the electronic guidelines,” he said of FINRA. “This was a huge help for the industry. You're dealing with a space in social media that financial firms have been prevented from using these forums and they have a lot of questions.”

SocialWare, which was founded in December 2008 and started selling its first product in beta six months ago, is positioning to help guide these companies. It issued a follow up guide to FINRA's recommendations in order to address more “granular” issues, such as the fact that a retweet on Twitter could be considered an endorsement, thus making the company culpable for it.

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