Social Media and Digital Communications
Investors and financial services professionals alike are increasingly using social media for a variety of business purposes. Social Media may be a new medium, but FINRA's rules on communicating with the public are still applicable. The rules protect investors from false, misleading claims, exaggerated statements, and material omissions. Below we identify key areas and concepts when using social media.
Books and Records
Firms and their registered representatives must retain records of communications related to their "business as such." The "business as such" requirement is based on the content of the communication not the type of device or technology used to receive or send the communication. These records must be preserved for a period of not less than three years.
FINRA's advertising rules and guidance do not apply to an associated person's personal use of social media. However, firms must educate their personnel on the difference between personal and business uses of social media. If firm personnel use a personal site for business, then this may result in a situation where the firm is unable to retain records of business-related communications as required.
Firms must have the ability to supervise the business-related content associated persons are communicating on these sites, including possible suitability determinations if recommendations are made. A registered principal must review prior to use any social media site that an associated person intends to use for business. The principal may only approve a social media site if the principal has determined the associated person can and will comply with applicable rules. Firms must also understand the difference between static content and interactive communications.
- Static content is typically posted for the longer term and lacks the immediacy of a real time conversation. Most static material must be approved by a registered principal prior to use, and sometimes may be required to be filed with FINRA.
- Interactive communications are typically real-time and involve a dialog with third parties. Interactive material does not require principal approval prior to use if it is supervised in a manner similar to the way firms supervise correspondence and institutional communications. Under the rules, if a firm allows associated persons to use interactive communications prior to principal approval, then the firm’s written supervisory procedures must provide for:
- Training of associated persons on the procedures and the content standards of the communications rules;
- How the firm will surveil these communications to test for compliance;
- What actions will be taken if problems are detected; and
- Documentation of any findings and the corrective actions taken.
The recordkeeping requirements apply to third-party content posted in a firm's interactive electronic forum. In addition, firms must ensure that they are reviewing third-party posts to properly identify and handle in accordance with firm procedures, any customer complaints, instructions, funds and securities, and communications that are of a subject matter that require review under FINRA rules and federal securities laws.
However, third-party posts generally are not subject to FINRA's advertising rules unless the firm has adopted or becomes entangled with the content of an interactive post. Adoption occurs when a firm endorses or approves third-party content and entanglement occurs when the firm involves itself with the preparation of the third-party post.
Linking to Third-Party Websites
Firms may not link to any third-party site that the firm knows or has reason to know contains false or misleading content. A firm should not include a link on its website if there are any red flags that indicate the linked site contains false or misleading content.
Additionally, a firm is responsible under FINRA's communications rules for content on a linked third party site if the firm has adopted or has become entangled with its content. For example, a firm may be deemed to have "adopted" third-party content if it indicates on its site that it endorses the content on the third-party site. A firm could be deemed to have become "entangled" with a third-party site if, for example, it participates in the development of the content on the third-party site.
Suitability rules apply to recommendations made through social media websites. Firms should:
- Develop procedures to supervise interactive electronic communications that recommend specific products.
- Prohibit interactive electronic communications that recommend specific products unless:
- a registered principal has previously approved the content, or
- the recommendation conforms to a previously approved template.
Fair and Balanced Communications
Firms must comply with FINRA's communication rule notwithstanding the medium – social media, email, or print.
- All communications must be fair, balanced and complete and not omit material information.
- False, misleading, promissory, exaggerated or unwarranted statements or claims are prohibited.
- Communications may not predict or project performance (with certain exceptions).
- Material information in a communication may not be buried in footnotes.
- Statements must be clear and provide a balanced treatment of risks and potential benefits.
- Communications must be appropriate for the audience.
This information is for general educational and informational purposes. The requirements discussed are not intended to be exhaustive. Rather, the information provides background on some of the applicable FINRA requirements. In addition, the rules may change from time to time; thus, you always should review the actual text of the rules for compliance purposes and specific guidelines.