Social media

As our world evolves further into the digital age, social media becomes more prevalent. The financial industry is no exception. Now, more than ever, financial firms are engaging their clients while marketing their products and services online. Virtually all financial representatives have a digital footprint on social media. Investors are hungry for information and share investing stories on message boards and their timelines. Accordingly, FINRA has created a number of relevant guidelines and rules.

Good news - generally all of the regulations we discussed in the previous chapter still apply to social media communications. Publicly available communications are generally treated like retail communications, while private chats are typically considered a form of correspondence. Financial professionals are prohibited from making false, misleading, or exaggerated statements. Omissions of material facts are strictly forbidden. Whether the communication is on paper, on a billboard, or on Twitter, the same general rules apply.

Social media and internet communications are certainly different when compared to more traditional mediums. Therefore, it’s important you’re aware of the unique ways they’re regulated. FINRA specifically highlights the following:

• Books and records
• Supervision
• Third-party posts and websites
• Suitability
• Fair and balanced communications

Books and records

Social media posts must be kept on record for a period of 3 years, with the most recently created records in the past 2 years being easily accessible. This is no different than the typical recordkeeping requirement of general communications.

FINRA does specifically mention one item directly related to social media:

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.

In plain English, a representative’s personal social media is not regulated by the same set of rules. Don’t worry - there’s no need to have your firm keep a record of the cute Instagram posts of your kids or pets. However, it’s quite possible a post could be considered a business use of social media. For example, if a representative creates a TikTok discussing the products and services of their firm. To ensure the “line in the sand” between personal and business content is known, firms must provide ongoing education (typically in the form of training modules or videos) to their employees. If FINRA were to consider a registered representative’s personal social media crossing into “business territory,” they and their firm could both face regulatory consequences.

Supervision

Firms must have a robust supervisory system in place when representatives create business-related social media posts. Many brokers, advisers, and representatives engage potential and current clients through web-based platforms. Just like all other forms of communication, firms must ensure regulatory compliance through proper supervision.

Prior to a representative utilizing a social media platform for the first time, it must be properly vetted and reviewed by a registered principal (supervisor). The primary purpose of the review is to ensure that FINRA rules and guidelines are capable of being followed on the platform. You can assume most of the major platforms - Twitter, Facebook, Instagram, TikTok, and YouTube - are already reviewed (and subsequently approved or prohibited) by most firms. If a representative wants to try out a new platform, they must gain principal approval prior to utilizing it.

Additionally, FINRA breaks down social media posts into two general categories:

• Static content
• Interactive communications

Static content
This type of social media content is defined as:

Typically posted for the longer term and lacks the immediacy of a real-time conversation

Examples of static content include blogs and social media profiles. FINRA treats these communications similarly to retail communications. In most circumstances, they must be pre-approved by a principal prior to posting and may be required to file a copy with FINRA.

Interactive communications
This type of social media content is defined as:

Typically real-time and involve a dialog with third parties

Examples of interactive communications include posts on interactive forums (e.g. Reddit), use of chat rooms, Tweets, Facebook posts, comments on other social media posts, and direct messages (DMs). FINRA typically treats these communications similarly to correspondence*. In particular, no principal pre-approval or FINRA filing is required, but they are subject to periodic review**.

*To be regulated as correspondence, it may not be viewed by more than 25 retail investors in a 30-day period. If this occurs, the content would be considered retail communication. Direct messages and small chats are likely to be regulated as correspondence, while public posts are generally regulated as retail communication.

**Periodic review can mean one of two things. First, registered principals within the firm should review these communications regularly. Most firms maintain technology to flag communications with certain keywords and have their registered principals review communications selected at random. Second, FINRA can request to view these documents, which would likely occur if they received a complaint from an investor.

Additionally, firms are required to maintain supervisory procedures that:

• Train representatives on procedures and content standards of communication rules
• Provide some form of surveillance of these communications
• Provide a process to follow if problems are detected
• Document any findings and/or corrective actions taken

Third-party posts and websites

Financial firms and their representatives sometimes repost third-party content and link to third-party websites. For example, a brokerage firm tweeting a link to an article on market activity on Yahoo Finance. Accordingly, FINRA maintains policies for these types of social media posts. If a firm adopts or entangles itself with third-party content, it comes under the umbrella of recordkeeping requirements (3 years, content posted within the last 2 years easily available). Let’s take a look at what FINRA considers adoption and entanglement:

Adoption occurs when a firm endorses or approves third-party content

An example of adoption would include a firm retweeting a financial blog with commentary (e.g. “Check out this interesting piece on the current state of the market”)

Entanglement occurs when the firm involves itself with the preparation of the third-party post

An example of entanglement would include a firm sharing a paid review of their products or services on TikTok.

Whether a firm adopts or entangles itself with third-party content, the shared material must be vetted, reviewed, and treated essentially as if it were the firm’s own creation. Similar rules apply if a firm simply links to a third-party website:

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

Suitability

What if a financial firm or representative recommends a securities-related product or service on social media? You guessed it - FINRA has rules for this type of communication as well. Firms must follow two general guidelines.

First, firms must create an adequate supervisory system that monitors these types of communications (similar to all other forms of social media communication). Second, recommendations through social media are generally prohibited unless meeting one of the two following criteria:

• The content was pre-approved by a registered principal
• The content conforms to a previously approved template*

*An example of a previously approved template would include a pre-approved Facebook post recommending a wealth management service to high net worth individuals. Representatives could simply repost this content in the future without needing to gain pre-approval again.

Fair and balanced communications

FINRA specifically calls out the same communication standards for general communications and applies them to social media posts. At this point in our material, you should feel very familiar with all of these requirements:

• All communications must be fair and balanced
• Communications cannot omit material information
• False, misleading, promissory, exaggerated, or unwarranted statements or claims are prohibited
• Material information cannot be hidden from plain view (e.g. buried in the footnotes)
• Statements must be clear and provide a balanced treatment of risks and benefits
• Communications must be appropriate for the audience