Finra Cautions Advisors About Social Media

(Dow Jones) New media is spurring new guidelines for brokerage firms and their employees.

The Financial Industry Regulatory Authority issued guidance this week to help firms establish procedures for communicating with the public through blogs and social networking Web sites. The self-regulatory organization said it has addressed the application of its rules to interactive sites in the past but continued to receive questions.

"This is finally substantive guidance for what will be expected by firms and advisors," says Catherine Hanks, founder of Strategic Compliance & Governance, a consultancy in Bethesda, Md.

The popularity of social networking and blogging Web sites like Twitter, Facebook and LinkedIn have sent compliance officers scrambling to adapt communication policies to these new media. Hanks says many brokerage firms have created policies they can't enforce, such as blanketly prohibiting brokers from using social networking sites.

Financial advisors know they could lose the next generation of clients if they don't interact on these Web sites and are participating in this space despite their firms' rules, she says.

Among the guidelines stressed by Finra was that firms are responsible for keeping records of all communications conducted by its registered representatives on social media sites.

""Finra rules require that for record retention purposes, the content of the communication is determinative and a broker-dealer must retain those electronic communications that relate to its 'business as such,'" according to the guidelines.

The guidelines also reminded broker-dealers that investment recommendations made over a social media site could trigger suitability requirements as outlined in NASD Rule 2310.

"Whether a particular communication constitutes a 'recommendation' for purposes of Rule 2310 will depend on the facts and circumstances of the communication," according to the guidelines.

The guidelines indicated that the question of suitability will be partly determined by the audience that has access to the social media site where the recommendation is made.

Finra also advised firms that they must adopt policies and procedures designed to ensure that those who participate in social media are properly trained and supervised.

Hardy Callcott, a partner at law firm Bingham McCutchen, said he's pleased Finra addressed firms' responsibilities regarding comments posted on firms' social media sites by customers or other third-parties. He's been fielding questions from brokerage firms that want to have a presence on certain sites, such as Facebook, but worried about monitoring such posts.

Compliance officers say the obligations of brokerage firms to retain information not kept on their internal servers remain unclear.

"If I'm a broker and go on Facebook while I'm at home, does the firm have obligations to monitor and retain the information from that activity?" says Bob Ellis, principal of wealth management research at Novarica, a research and advisory firm.

The guidelines reflected input from a task force Finra convened last fall that included industry representatives. The information is meant to protect investors from false or misleading claims, while allowing brokerage firms to communicate with investors using new technology.

Large broker-dealers like Bank of America Corp.'s Merrill Lynch and Morgan Stanley Smith Barney don't allow advisers to conduct business through social networking sites.

"There are substantial restrictions on its use right now, but we are continuing to review the issue," a spokeswoman for Morgan Stanley Smith Barney said.

UBS AG allows financial advisers to use social networking sites outside of the office but not for anything related to UBS business or their activities at the firm. Wells Fargo & Co. (WFC) allows its financial advisers to post biographical information on sites such as LinkedIn, but doesn't allow participation on blogs, Twitter or Facebook.

New technology is emerging that aims to help brokerage firms comply with Finra 's communications rules. Companies such as Socialware Inc. and Smarsh Inc. allow companies to monitor and archive social messages.

A social-networking site called linkedFA launched in December, claiming to provide the compliance, supervision and recordkeeping features necessary for any firm to comply with Finra rules.

The site allows advisers to create three separate profiles to interact and display different information to clients, peers and recruiters. By capturing and storing communications for six years, everything is "extractable and reportable," says founder Brian Bryne.

Bryne says linkedFA tried to provide input to the Finra's social networking task force.

Still, Finra made clear in its regulatory notice that each brokerage firm must determine whether any technology system or program provides necessary functions to comply with the rules and explicitly said it doesn't endorse any particular existing technology.