Is your social networking process compliant?

FINRA has issued its guidance on social networking sites--such as LinkedIn, FaceBook, Twitter and blogs--making clear what we've all known: There are serious issues for broker dealers when it comes to recommendations, supervision, advertising and records. Obviously, these guidelines (Regulatory Notice 10-06) are meant for financial services firms, but there are lessons here for all companies struggling to balance the risks and rewards of what has become a profound movement. 

The guidance emphasizes that firms must develop policies and procedures--in the context of its own business and compliance programs--designed to ensure that it is "complying with all applicable regulatory requirements when using social networking sites." While some technology vendors are developing systems that are intended to enable retention of communications via social networking sites, FINRA did not endorse a single technology. It made clear that it is not certain "that adequate technology currently exists." Still, there is no getting around the record retention requirement, and at most places this will mean a technology investment. 

The guidance also makes clears that recommendations via these sites are governed by suitability requirements. There are other communications issues as well. Firms are asked to adopt policies and procedures reasonably designed to govern recommendations of specific investments. "As a best practice, firms should consider prohibiting all interactive electronic communications that recommend a specific investment product and any link to such a recommendation unless a registered principal has previously approved the content." Or firms might consider prohibiting communications that recommend a specific investment product unless the communication conforms to a pre-approved template and the specific recommendation has been approved by a registered principal.

As for blogs, if it is interactive in nature and makes recommendations, it must be supervised. 

This is a burden that firms cannot blow off. The time to act is now. The new guidelines lay "the groundwork in holding firms accountable and should negate any hesitation that may have existed in terms of implementing and enforcing policy. The "wait and see" approach to social networking can leave broker dealers exposed to reputational and compliance risks. "2010 will likely be the inflection point, and as the first high-profile prosecutions occur, firms will realize that they can't fly under the radar anymore," said Steve Marsh, CEO of Smarsh. "Chances are you're not going to get let off with a warning by pleading ignorance." - Jim