Even employees' LinkedIn profiles ought to be supervised

February 26, 2010 — 7:49 AM UTC by Les Abromovitz, Guest Columnist

1 Comment

One reason I’ve shied away from the use of social media is that I hate abbreviations. I don’t like having to remember that IMHO stands for “In My Humble Opinion” or LOL means “Laugh Out Loud.” Despite my inability to cope with abbreviations, I recognize that social media is here to stay and the folks in compliance should point RIAs in the right direction. An abbreviated discussion of FINRA’s social media compliance guidance is a good place to start.

FINRA’s guidance has implications for RIAs

The Financial Industry Regulatory Authority (FINRA) provided guidance regarding the business use of social media in Regulatory Notice 10-06 on Jan. 25. Though FINRA’s Notice is aimed at securities firms and brokers, registered investment advisers (RIAs) will learn a great deal about social media compliance by reading it. Although the rules governing RIAs are different, an SEC or state examiner might take the same position as FINRA on your use or misuse of social media. Furthermore, registered reps who are also investment adviser representatives (IARs) for advisory firms should be paying close attention to FINRA’s social media guidance.

The Notice requires firms to ensure that business communications using social media are captured in accordance with books and records rules. According to FINRA, a firm must be certain it has the technology, system or program that will allow it to retain and retrieve communications using social media. The Notice cautioned, “FINRA does not endorse any particular technology necessary to keep such records, nor is it certain that adequate technology currently exists.” As I have indicated in previous postings, an RIA’s use of social media for business purposes is subject to the retention requirements of the Investment Advisers Act’s Books and Records Rule.

FINRA’s Notice warns broker-dealers and registered reps that they are subject to NASD Rule 2310 if a communication using social media constitutes a recommendation. Broker-dealers must determine that a recommendation is suitable for every investor to whom it is made. As a best practice, FINRA advises firms to consider adopting policies and procedures that prohibit specific investment product recommendations using social media.

Distinguishing between static content and real-time interactive communications

FINRA’s Notice makes a distinction between static content and real-time interactive communications. For example, some blogs consist of static content that is posted by the blogger. Many blogs, however, allow users to engage in real-time interactive communications. Social networking sites, such as LinkedIn, Twitter and Facebook, often include static content and interactive communications.

FINRA views static content as an advertisement that is subject to NASD Rule 2210. If a brokerage firm or one of its reps sponsors a blog with static content, it is subject to prior principal approval. Even if you frequently update a blog that is not interactive, FINRA still takes the position that the content is static and pre-approval is required.

When a blog is used for real-time interactive communications, FINRA views it as an interactive electronic forum. As such, it does not require prior approval by a registered principal. Nevertheless, the firm still has an obligation to supervise the blog.

Because social media like LinkedIn, Twitter and Facebook contain a mixture of static content and interactive functions, FINRA believes that firms should treat them differently. A registered principal of the firm must approve static content in advance. Interactive communications do not require pre-approval, but must in all cases be supervised by the firm.

FINRA’s Notice advises firms to develop policies and procedures governing the supervision of social media. Firms can use risk-based principles to determine what type of review is necessary. FINRA’s Notice urges firms to implement a policy prohibiting any associated person from engaging in business communications using unsupervised social media. That includes an individual who develops a profile on, say, LinkedIn, if it is used for business purposes.

RIAs should take heed and must develop their own policies and procedures governing the business use of social media. These policies and procedures should help to ensure that investors are protected from the misuse of social media.

Posts by customers and third parties

FINRA’s Notice does not treat a posting by a customer or other third party as a communication with the public that is subject to Rule 2210. Therefore, there is no need for prior principal approval nor do the filing and content requirements of Rule 2210 apply. Nonetheless, third-party postings may be attributed to the firm if the broker-dealer or registered rep was involved in creating the posting or adopted the content by explicitly or implicitly approving it.

If you apply FINRA’s logic to the SEC rule prohibiting RIAs from using testimonials in advertisements, you realize there’s a chance that advisers won’t be penalized for third-party posts praising them.

However, RIAs will be in a heap of trouble if they helped to prepare those testimonials or were somehow involved in causing them to be posted. Obviously, content is false or misleading if an adviser orchestrates the posting of testimonials on blogs and social networking websites. Even if a positive comment is an unsolicited testimonial, the SEC might insist that the adviser remove it or be in violation of the advertising rule.

If and when the SEC takes a stand on RIAs’ use of social media, I believe it will reach many of the same conclusions as FINRA.

That’s all IMHO.

When it comes to RIAs’ use of social media, we will need to see if examiners have a different opinion than my humble one.

Les Abromovitz is a senior consultant with National Compliance Services Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.

Mentioned in this article:

NCS Regulatory Compliance
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Top Executive: Mark Alcaide, COO/Partner

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Chad Bockius said:

February 26, 2010 — 2:20 PM UTC

Les – great post.

As you point out FINRA mentions “Because social media like LinkedIn, Twitter and Facebook contain a mixture of static content and interactive functions, firms should treat them differently.” As you peel back the onion on these sites you realize that the compliance issues are many and often unique to each site. For example, using LinkedIn Recommendations as part of your profile. Or take favoriting a Tweet on Twitter. In the process of clicking that little star you just endorsed a third party post.

RIA’s that are going to take the step into social should first work to better understand the nuances of each site. In addition, they should explore automated social networking compliance solutions. If you are interested in learning more you should check out the Companion Guide to FINRA Social Networking Compliance <a href="http://bit.ly/8xT73y">http://bit.ly/8xT73y</a>. It picks up where Notice 10-06 leaves off, offering additional detail on social networking considerations and a checklist of requirements for choosing a social networking compliance vendor.

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