Keeping up with the pace of change in social media is difficult for everyone. For broker-dealers, remaining in compliance with regulatory guidance is particularly difficult. Customers are constantly demanding more and more channels for online communication. Conforming to regulatory record-keeping involves keeping a firm’s staff educated about the rapidly changing online environment and the rules governing digital channels of communication.
Broker-dealers have had so many questions about social media and digital communications that, in response, the Financial Industry Regulatory Authority (FINRA) recently issued guidance in the form of frequently asked questions (FAQs) to help steer members through the complicated subject.
The FAQs, which supplement their existing guidance and the prevailing SEC’s rules, address the following topics: (a) text messaging, (b) personal versus business communications, (c) third-party content and hyperlinks, (d) native advertising, (e) testimonials and endorsements and (f) links to BrokerCheck.
The FAQs reiterate that the recordkeeping requirements of Rule 17a-4 of the 1934 Exchange Act (“Rule 17a-4”) apply to digital communications. This includes all text messaging and chat services. As a result, prior to the use of text messaging and chat services in the conduct of the firm’s business, firms must ensure they’re able to reliably capture and retain records of these communications.
Only “business communications,” or communications relating to the products or services of the firm, are subject to the filing and content requirements. “Personal communications,” or communication that “does not concern the firm’s products or services,” are never subject to retention requirements.
Hyperlinks & Third-Party Material
Broker-dealers may post materials from outside sources; however, this creates a dilemma. By posting, or linking to external material, the firm may be construed as “adopting” the information posted there. There’s a two-fold test to whether a broker-dealer has adopted third-party content – 1) if the link is continuously available to investors, regardless of whether the site contains favorable material about the firm (“ongoing” link), then it’s not “adopted” for purposes of this Notice and 2) if the firm has influence over the content, then it may be considered “adopted.” If determined that the content has been adopted for the purposes of the regulation, the broker-dealer may be deemed responsible for its content and retention. The recordkeeping requirements of Rule 17a-4 would apply to any material that would have been displayed on those third-party sites at any time. Unless automated, monitoring and retaining all information displayed on a third-party site could be a seriously onerous obligation.
Therefore, firms need to exercise extreme caution when adding links to their social media. The regulator is concerned that these sites may include questionable or misleading material. The notice also addresses issues that arise when embedded sites get updated after they have been posted on the broker-dealer’s social media. A firm could potentially be responsible for content posted on a third-party’s site at a later date. For this reason it’s critical that broker-dealers only embed links to trusted third-parties and review them regularly.
FINRA does recognize that firms cannot control remarks made by third-parties, such as retail customers, in ‘comment sections.’ The FAQs state that FINRA requires that the link or third-party material “when read in context with the statements in the originating post… complies with the same standards as communications created by, or on behalf of, the firm.”
The rules related to client communication are clear — the firm may not share content that it knows or has reason to know is false or misleading — regardless of whether the sharing is through traditional attribution or modern hyperlinks.
We’re all familiar with native advertisement, even if we don’t recognize the term. It’s online advertising designed to resemble a publication’s usual content, but in fact, is paid for by the advertiser – such as an advertisement on a news website intended to look like a news article. FINRA members may use native advertising, provided the content complies with the requirements of FINRA’s Rule 2210 – Communication with the Public.
The FAQs also address the use of so-called ‘influencers.’ Influencers are real, relatable people who have attracted a following on social media. Paid influencers used in broker-dealer advertising must comply with the native advertising guidelines.
Testimonials and Endorsements
Unsolicited opinions of third parties are not deemed to be communications of the firm for purposes of Rule 2210 or testimonials subject to the requirements of Rule 2210(d)(6) according to the FAQs. However, FINRA members should be aware that liking or sharing a third-party’s content will be construed as adopted by the broker-dealer and subject to content and record-keeping rules. Firms need to make sure their employees understand the implications of a simple share or like button!
Broker-dealers should carefully, and immediately, review this latest notice and integrate FINRA’s guidance into their communications policies and employee training. The risks and costs associated with misleading or prohibited advertising are potentially enormous. Broker-dealers have faced substantial regulatory fines in the past and lost millions defending against class-action suits resulting from misleading communication. Most of these issues may be readily avoidable with diligent risk control of communications, including all social media channels. This latest – and clearest – notice is intended to make the rules surrounding digital communication and social media more understandable.
Heather Kane is a Financial Institutions Resource and Client Advocate in Willis Towers Watson’s Financial Institutions Industry Group with 15 years of insurance industry experience. She works closely with our Financial Institution teams to help drive differentiated and high value solutions for banks, insurance companies, asset managers and other diversified companies. Heather also provides client advocacy for several complex Financial Institution clients and is responsible for identifying risk issues and providing clients with superior service and timely, innovative and relevant solutions.
Richard Magrann-Wells is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angeles. During his 25-year banking career, he has managed sales, trading and structuring teams for some of the biggest financial institutions. A regular contributor to American Banker newspaper and other publications, Richard writes about financial technologies (“FinTech”), financial crime, operational and executive risk.