The good news for those considering a move to social is that FINRA clarifies you do not need prior approval for communications posted on social sites as long as they qualify as interactive electronic forums. FINRA tried to introduce the concept of static vs. interactive with Notice 10-06 but unfortunately it created more confusion than clarity in the market. That was the one component introduced in 10-06 that was new, but there were no rules in place to support the actual definitions. The rest of 10-06 was clarification on existing rules. So we are back to where we started. It is all about the content and it’s classification.
You can access the entire SEC submission here, but to save you some time I’ve gone through and called out the parts that are most applicable to social media.
The current NASD Rule 2210 divides communications into six separate categories:
- Sales Literature
- Institutional Sales Material
- Independently Prepared Reprints
- Public Appearance
FINRA is proposing to reduce the categories from six down to three. The new categories would be as follows:
- Institutional communication: includes all communications that fall within the current guidelines.
- Retail communication: includes any written (including electronic) communication that is made available to more than 25 retail investors within any 30-day period.
- Correspondence: includes any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-day period.
The proposal eliminates the current definitions for advertisement, sales literature, institutional sales material, public appearance and independently prepared reprints. They point out that “communication that currently qualifies as advertisements and sales literature would generally fall under the definition for retail communications.”
As it relates to Retail communication they provide a supervisory exemption for specific categories of this communication type. Two of these categories matter for social media. The first is any retail communication that is posted on an online interactive electronic forum (eg., social networks). The second is any retail communication that does not make any financial or investment recommendation or otherwise promote a product or service of the member.
FINRA explicitly points out that the clarification around interactive electronic forums “codifies their current interpretation of the rules governing communications with the public on interactive electronic forums.” In other words, Notice 10-06 provided guidance to the industry but did not actually create any new policy. This change will make the interpretation explicit from a rule standpoint. There is no mention of the notion of static vs. interactive, which has caused confusion in the industry since no policy exists to back up those definitions introduced as part of 10-06. The second exemption broadens a current principal such that it would apply to all retail communication. This second exemption is important for social media because so much of what gets shared isn’t financial or investment related.
Both of these are positives for firms looking to embrace social for their reps.
In a nutshell it makes clear that organizations DO NOT need to pre-review content that is posted to social networks like Facebook, LinkedIn and Twitter.
Of course, recordkeeping requirements sill must meet the current standards. In addition to the recordkeeping, firms must supervise this content in the same manner as correspondence (i.e., post-review).
FINRA also reminds readers that rules around predicting performance, implying past performance will recur or making any exaggerated or unwarranted claim, opinion or forecast still apply. In other words your content must be fair and balanced. Something that a California-based broker failed to adhere by and as a result of her tweets was fined and suspended by FINRA.
One of the other interesting additions was the following: “Given the rapid changes to technology used to communicate with customers, FINRA believes it will be useful going forward to have exemptive authority with regard to the principal pre-use approval requirements applicable to retail communication in certain circumstances.” This statement shows an understanding that technology and communication mediums are evolving faster than policy can keep up. In theory this will help FINRA support the industry in a timely fashion without having to wait for formal rule clarifications or modifications (like this one).
3rd party comments were mentioned but FINRA felt that Notice 10-06 in combination with previous guidance adequately addressed that topic.
The one area not specifically called out is social networking profiles. Going back to 10-06, FINRA calls for this content to be pre-reviewed and classified it as an advertisement. Under the proposed rule change it would now be classified as a retail communication. There is nothing in the proposed changes that would suggest it qualifies for the exemptions outlined above. As a result this content must still be pre-approved before being posted to social networking sites.
Comments on the proposal must be submitted to the SEC on or before August 24, 2011. At this point it is anyone’s guess as to when this will be finalized and approved. Independent of that date, these changes provide some great insight into how FINRA will look at social media communications. I suspect other state and federal regulators will be taking note as well.