• FINRA Proposes New Content Rules

    A few days ago FINRA submitted to the SEC proposed rule changes regarding communications to the public.  The goal of the changes is to simplify and consolidate many of the existing rules.

    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.

    Communication Categories

    The current NASD Rule 2210 divides communications into six separate categories:

    • Advertisement
    • Sales Literature
    • Correspondence
    • 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.

    Category: Compliance, FINRA/SEC | Tags: , , , , , , , , , .


8 comments on “FINRA Proposes New Content Rules

  1. Alex Fraser says:

    This proposal, if adopted, should take away one of the barriers to social media adoption we see from our clients – the need for staff augmentation to pre-approve conversations from their field agents. This will certainly facilitate and accelerate social media adoption strategies which ultimately should have a positive impact on the brand and the consumer.

  2. Stephanie Sammons says:

    Thanks for summarizing Chad. Sounds interesting and also very practical!

  3. Looks like we are making progress and getting closer to clearer guidelines and a better understanding of the value social provides to the client/advisor relationship. Thank you for the summary.

  4. Scott H. says:

    I’m rather confused. First, the author states that “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.”

    Then, near the end of the article, he reverses this statement, writing “There is nothing in the proposed changes that would suggest [a Social Networking Profile] qualifies for the exemptions outlined above. As a result this content must still be pre-approved before being posted to social networking sites.”

    Is the first simply addressing Registered Reps? Are Social Networking Profiles limited to those administered by the member?

  5. Mike Alfred says:

    Pre-approved communications are fundamentally contrary to the spirit of social media. If you can’t actively engage in real-time, you might as well skip social media altogether. It is good to see FINRA begin to move away from some of their counterproductive and anachronistic positions so that brokers can enter the 21st century. It’s important that everyone engaged in the debate around these issues continue to use every opportunity to influence FINRA to act proactively. The entire financial services industry stands to benefit greatly if regulators can get their act together and put forward sound forward-thinking policies.

  6. Chad Bockius says:

    Scott – thanks for the comment. I probably should have moved the profile discussion to the top. Across the industry everyone is on the same page that profiles need to be pre-approved. This was the case with 10-06 and I don’t see any new policy that would suggest a change.

    The discussion around the “content” of a social network is the area that caused the most confusion and the new rules take a big step to clearing it up for firms. If I understand you question correctly – all of these rules apply to registered reps. The discussion around pre-review is only applicable for those social sites that are being used for business purposes. Let me know if you have follow-up questions.

  7. Mike Byrnes says:

    Sounds like the regulatory bodies are figuring out that social networks are really social commerce and that their restrictive rules have held bad the industry, probably more than any other industry.

    Thanks for the post. Just tweeted it out!

    Mike Byrnes, President of Byrnes Consulting, LLC

  8. Pingback: Addressing the Regulatory and eDiscovery Challenges of Social Media | e-discovery 2.0

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