The difficulties presented by social media cannot be ignored.
We have written in the past about the regulatory and legal issues involved with social networking websites that may be used by those in the financial-services industry. Just as technology has surpassed people's ability to understand and effectively utilize it, so has social networking hit the financial-services industry with a bang.
FINRA has issued a pair of Regulatory Notices (10-06 and 11-39) that involve the use of social media. FINRA has also made some podcasts on the subject and has published a guide to the internet for registered representatives.
The difficulties presented by social media cannot be ignored. The proliferation of smartphones and other technological wonders that enable constant communication from small devices allows everyone to be connected at all times on almost any subject. The likelihood of violation of the regulatory rules applicable to the financial-services business is profound--even violations that are unintentional.
Virtually every business entity these days has a website designed to entice customers to do business with the site's sponsor. Search engines publish advertisements that promote businesses that pay for the privilege. Such forms of advertisement have been around for quite some time, and it is well-established that these forms of communication are subject to the advertising and communication rules that apply to regulated entities. With the advent of businesses utilizing social media sites, the issue of the applicability of regulatory limitations on communication becomes less clear cut.
Social media that is used in a business context is a form of business communication that is subject to the regulatory limitations and requirements that apply to all forms of business communication. This means that supervisory personnel of a financial-services company must exercise the same degree of supervision and review that would be utilized with any other business communication. It is clearer what this means when the social media is a company-sponsored site. It is less clear and considerably more difficult to police when the social media is not part of a company-sponsored site. When registered representatives engage in communication on non-company-sponsored social media sites, it can nevertheless be a business communication that gives rise to regulatory liability if the appropriate rules are not followed.
We have, for decades, dealt with issues surrounding the definition of "advertisements" versus "sales materials" versus "correspondence." The use of social media merely compounds the problems in differentiating among the rules applicable to the various forms of communication. An "advertisement" is a communication directed to a general audience--usually in the form of advertisements in or on newspapers, magazines, radio and television, websites, and similar broadly published forms of communication. "Sales literature" includes brochures, pre-approach scripts, form letters, and the like. "Correspondence" consists of letters, instant messages, market letters, and electronic mail that is sent to existing customers and to fewer than 25 prospective customers in a 30-calendar-day period. The content of social media communications could encompass any of these definitions, depending on the content of the message and the intended audience.
We have heard complaints from a number of compliance officers that it is impossible for them to review all social media communications on other than company-sponsored sites. This is certainly a legitimate point of view. The "world wide web" is everywhere and nowhere. The technology does not exist for compliance personnel to be able to review every possible communication from every person for whom they are responsible. Currently, no regulatory agency requires such omniscient behavior. Yet, financial-service professionals who are subject to FINRA regulation and to regulation by the SEC and state insurance and securities regulators are nevertheless liable for their actions on any social media website.
The best form of protection is for individuals to avoid using non-company-sponsored sites for any type of business communication. If all business communication is limited to company-sponsored sites--even social media sites--then the supervisory requirements are lessened. This does not, however, completely exonerate supervisory personnel from all liability from misused social web sites. Company policies regarding the business use of social websites outside of company sponsorship, as well as training of all sales personnel regarding what is permitted and what it forbidden, should be combined with reasonable spot checks to ensure the rules and policies are being followed.
It is important for everyone involved to recognize that record-keeping requirements are applicable to all forms of communication, including social media communications. Supervisory personnel must ensure that everyone is aware of these requirements with respect to business-based social media communications and that a mechanism exists for the necessary records to be created and maintained.
Insurance agents are no more exempt from requirements involving the use of social media than are registered representatives. The NAIC has provided state insurance regulators with a draft "white paper" on the "Use of Social Media in Insurance." Most state insurance departments are presently assessing their positions and where they should act with respect to using social media for insurance sales. It appears as though a major point of focus of state insurance regulators for the next few years will be in the area of reviewing social media use through market conduct examinations and through consumer complaints.
The use of social media in the financial-services business is rapidly evolving, and wise people in the industry will recognize this rapid development and institute policies and procedures to match.
Judith A. Hasenauer is an attorney with the law firm of Blazzard & Hasenauer, P.C. She devotes her practice exclusively to the financial services industry, providing consulting on the development and regulatory clearance of products, compliance issues, distribution issues, and related matters, such as advisory activities and industry initiatives.