Social Media & Finra Requirements for Broker-Dealers

– By Barry Gainsburg & Christopher Driscoll, CXG

Social Media & Finra Requirements for Broker-Dealers

In a world of evolving social media sites, it is difficult for Broker-Dealers to find definitive guidance regarding compliance requirements, and how these sites can be used effectively. The quick take away: common sense and a risk based approach are the key items for demonstrating that adequate supervisory procedures are being implemented and enforced. So as the end of 2017 quickly approaches, we at Compliance Exchange Group would like to offer some background and commentary for your consideration that may help you design better social media procedures for 2018:

Q: Is a Registered Representative’s (“RR”) use of Social Media governed by FINRA?

A: Yes. Communications by RRs via social media – like Facebook and Linkedin – are governed by FINRA Rule 2210 – Communications with the public. In short, FINRA states that social media is just another form of communication, and ought to treated as such. See http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=10648.

Q: What is a Firm’s basic supervisory obligation over a RR’s use of Social Media?

A: Finra has provided guidance extending the use of traditional FINRA rules (formerly governing communications with the public) to include the use of social media sites. At a minimum, a Firm must address the following categories with respect to use of Social Media:

Supervision 

– Firms must supervise social media communications based on the content involved.

Suitability

– If Reps are discussing securities via Social Media, Firms must confirm that every “recommendation” is suitable for each investor to whom it is made.

Recordkeeping

– Firms that communicate through social media must keep records of those communications.

Content 

  • For static content like security recommendations or research placed by a RR on social media, a registered principal of the firm must approve the communication before it is posted.
  • For interactive communications, meaning comments to posts and a running dialogue, no prior approval is required, although Firms must supervise these strings in a manner ‘reasonable designed’ to ensure Finra communication rules are not violated.
  • For third-party posts FINRA does not attribute such posts to a Firm unless the Firm or its personnel either contributed to the posting or adopted/endorsed its content.

Q: How does FINRA treat testimonials made by third parties on social networking sites?

A: Testimonials 

– There have been many questions from the industry about testimonials, particularly in the context of LinkedIn, where there exists both “skills and endorsements” and “recommendations” for individuals and companies. FINRA’s position in short: to the extent that someone endorses the Firm or a RR’s product or service without solicitation, then the RR would not become “entangled”, having not “adopted” the testimonial. However, should a RR solicit a recommendation from a person, or, after having received an endorsement, ‘likes’ the comment made, then the RR has essentially “adopted” the testimonial, thereby initiating the applicability of recordkeeping, suitability and supervisory rules.

Q: How can a Firm address a RR’s personal use of Social Media sites?

A: In short, it is best to create clear distinctions between a RR’s personal social media on-line presence and any social media presence involving the Firm and/or securities related communications. We believe that it would be best practice to have any RR seeking to have a social media presence involving their Firm and/or securities business to establish a separate account which can be monitored, reviewed and recorded by Compliance. Additionally, an attestation should be obtained stating that the RR understands that any and all business communications with the public through social media be conducted solely through the Firm approved account, and that personal accounts, in addition to business social media accounts, will be subject to random review as well to ensure compliance.

Q: Is a firm only required to supervise a RR’s social media account if the RR is conducting business or solicitation on said Social Media account? If the former is true, would an attestation from the RR, and perhaps some routine continuing education demonstrate that the Firm was implementing adequate supervisory procedures? 

A: With regards to Social Media it appears that FINRA will allow Firms to take a risk based approach to supervision and the adoption of adequate policies. Obtaining a signed acknowledgment by the RR and having the Firm conduct Continuing Education on Social Media would be a reasonably calculated risk based procedure. So depending on several factors, including: the nature of the RR’s communications, the size of your firm, the frequency of Social Media use, the use of static pre-approved or dynamic postings, as well as the Firm’s underlying business and totality of its written supervisory procedures, the suggested course of action may indeed be sufficient to demonstrate the implementation of adequate supervisory procedures.

In conclusion, while each Firm is different, there are no definitive rules regarding how your Firm designs its written supervisory procedures to address Social Media. We at Compliance Exchange Group are always here to assist with this or any other securities industry related needs. Always feel free to reach out and speak with one of our Principals. We’re here to help. Visit us at https://cxgllc.com

For additional information, see:

  • Rule 2210 – Communications with the public
  • Regulatory Notices 10-06, 11-39 and 17-18
  • FINRA Rule 2111
  • FINRA Rule 4510 and Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934


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