
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comCounsel
212-286-0747 dbrecher@sh-law.comBrokers and advisers increasingly rely on social media to connect with current and potential clients. After all, don’t we all prefer to read a 140-character Tweet promoting a new investment opportunity instead of digesting a 20-page prospectus filled with boilerplate and legalese?
The Financial Industry Regulatory Authority (FINRA) has previously issued social media guidance regarding how investment firms can take advantage of social media without running afoul of their compliance obligations. However, the existing guidance surrounding the use of social media has largely failed to keep pace with the popularity of social media, leaving a lot of “gray” areas and opportunities for compliance missteps.
In response, FINRA recently released a Regulatory Notice entitled, Social Media and Digital Communications: Guidance on Social Networking Websites and Business Communications. The guidance addresses the application of FINRA Rule 2210 to social media through a series of questions and answers.
FINRA Rule 2210, which governs communications to the public, requires that broker-dealers’ communications are fair and balanced and do not omit material information that would cause them to be misleading. FINRA previously addressed how the rule applies to posts to social media sites and other digital communications. In addition to recordkeeping obligations, FINRA has provided guidance on third-party social media posts and hyperlinks to third-party websites.
In Regulatory Notices 10-06 and 11-39, FINRA advised firms that they are obligated to retain records of digital communications that relate to their “business as such” and that determining whether a communication must be retained depends on its content and not upon the type of device or technology used to transmit the communication.
Regulatory Notice 10-06 that, as a general matter, posts by customers or other third parties on social media sites established by a firm or its personnel do not constitute communications with the public by the firm or its associated persons under Rule 2210. Exceptions include if the firm or an associated person has (1) paid for or been involved in the preparation of the content (referred to as “entanglement”) or (2) explicitly or implicitly endorsed or approved the content (referred to as “adoption”).
Regulatory Notice 11-39 advised that a member may not establish a link to any third-party site that the firm knows or has reason to know contains false or misleading content and may not include a link on its website if there are any red flags that indicate the linked site contains false or misleading content. It further stated firms can be liable under FINRA rules for content on a linked third-party site if the firm has adopted or has become entangled with its content.
In April, FINRA offered additional guidance, citing the proliferation of social media as well as requests from the industry for greater clarity on certain issues. The guidance consists of 12 questions and answers, with topic ranging from testimonials to native advertising. Below are several highlights:
Social media is a frequent area of concern during FINRA exams. FINRA has also conducted targeted social media “sweeps” in the past. Accordingly, member firms should thoroughly review the entire posting and discuss any compliance concerns with experienced counsel. Therefore, if you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, at 201-806-3364.
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