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  • Social Media Compliance Policies For Financial Firms 0 comments
    Nov 9, 2011 2:46 PM

    The following is a guest blog post from Jeffrey E. Kopiwoda and Seth A. Stern with the law firm Funkhouser Vegosen Liebman & Dunn Ltd.


    Develop A Clear Social Media Policy

    Social media offers significant opportunities for financial firms but also poses commensurate risk to firms that are unaware of legal issues affecting the medium. Financial regulators so far have shown little willingness to adapt to the instantaneous sharing of information.  Social media – which thrives on real-time communication – is therefore subject to rules designed for traditional media.  Firms should implement clearly worded policies to ensure their employees do not unknowingly draw regulatory action.

    For instance, the NFA requires podcasts and YouTube videos to go through the same ten-day approval process applicable to television and radio ads under Rule 2-29(h).  Further, regulators including the NFA and FINRA will treat tweets qualifying as promotional or advertising materials the same as formal reports.  Even “liking” someone’s post on Facebook arguably could be considered a regulated endorsement. Firms should not assume that social media will be treated leniently due to its informality.

    Know The Rules

    Regulated entities’ social media activities (like their offline activities) must comply with rules including:

    • NFA Rule 2-9, which requires Members to diligently supervise employees in the conduct of their activities on behalf of the Member (including social media posts).
    • NFA Rule 2-29 and 2-36, which prohibit fraudulent and misleading communications and include numerous specific requirements for “promotional materials” and other categories of communications, including mandatory disclaimers which are not particularly Twitter-friendly.
    • NASD (now FINRA) Rules 2210(b) and 3010, requiring advertisements and other correspondence and literature to be approved in writing by a principal.  Social media sites, blogs, and bulletins (both corporate and individual) must be reviewed prior to their launch and “static” content qualifying as advertisements also must be reviewed in advance.  Content qualifying as a “public appearance” (including chat-rooms and comments to others’ social media sites and blogs) also requires supervision.
    Keep Accurate Records, Supervise Diligently

    Record-keeping and archiving requirements also apply to social media.  NASD Rules require firms to retain all advertisements and business communications – including information posted on websites and social media posts.  This includes communications sent from smartphones and other devices.  NFA Rules also require Members to maintain promotional materials.  A proposed amendment to CFTC Rule 1.35(a) would require regulated entities to record all communications which lead to the execution of transactions and categorize them by counterparty and transaction.  This would include “digital or electronic media” communications.

    Moreover, Firms’ supervision requirements extend beyond their own employees.  You may have heard that website hosts are not liable for third-party content such as comments on blogs and wall posts.  While this is true for most online publishers under federal law, the NFA has issued guidance to the contrary.  According to NFA Interpretive Notice 9063, a Member or Associate must “regularly monitor the content of the sites it hosts, take down any misleading or otherwise fraudulent posts, and ban users for egregious or repeat violations.”  The more successful a site becomes the more it attracts third-party content that must be monitored. Unfortunately, smaller firms without compliance departments may find it difficult to regularly monitor content.

    Adopt, Update, Enforce

    All firms using social media should adopt, update, and enforce policies governing social media use.  Regulators will want to see such policies, as well as proof that they are enforced, in the event of an audit or investigation.  Firm policies should cover both the firm’s own online activities and employees’ independent activities.  The NFA suggests that policies require employees to notify their employer of any participation in online financial or trading forums and provide screen names so employers can monitor their posts (though employers should be cautious of privacy concerns when doing so).  Polices should make clear that a firm’s procedures manual applies to online communications.

    Handle With Care

    While this post focuses on issues specific to financial firms, such firms are subject to the same legal considerations that affect all social media users.  Members of our law firm have written extensively about issues affecting both publishers of social media content and employers of social media users.  Also note the National Labor Relations Board’s recent crackdown on employers who discipline employees for their social media use.  Financial firms may be especially interested in recent cases involving the “hot news doctrine.”  A federal appellate court held that a website was within its right to republish, virtually instantaneously, analyst reports banks published for paying clients because the banks’ reports constituted news of interest to the public.  Firms may want to limit how much they share via social media even where they believe content is accessible only to “friends,” “followers” or password-holders.

    When In Doubt, Consult With Counsel

    This post is by no means an exhaustive list of all regulations and legal issues facing financial firms utilizing social media, and the law will continue to evolve with new technologies and as regulators enact rules to comply with the Dodd-Frank Act.  Regulated firms and individuals should consult with counsel to determine which regulations apply to them and what policies are appropriate given their circumstances.

    Jeff Kopiwoda and Seth Stern are attorneys with the firm Funkhouser Vegosen Liebman & Dunn Ltd. (FVLD).  They and other FVLD attorneys regularly counsel clients in the financial services industry and elsewhere regarding social media and numerous other compliance issues.  This article is merely informational and does not constitute legal advice.

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