Regulatory Outlook | 07.31.18
In New Era of Social Media, an Old Rule Still Applies
For a wedding planner, some glowing testimonials posted online can be a formidable marketing tool. For a financial planner, they're forbidden.
Recently, the Securities and Exchange Commission (SEC) charged some investment advisory firms with violating a decades-old rule that prohibits advertisements that refer to any form of testimonial pertaining to financial services provided.
At least one of the four enforcement actions, according to the SEC, involved Leonard Schwartz, a third-party marketer. Schwartz provided testimonial services to the advisors. One of his programs was called "Squeaky Clean Reputation" and billed as a fully compliant way of harvesting client testimonials and then posting them on social media websites, such as YouTube, Google, Facebook, Twitter and Yelp.
Social media miscues have cropped up now and again in the advisory industry over the past decade.
A few years ago, the Financial Industry Regulatory Authority (FINRA) fined a securities analyst $15,000 for tweeting opinions about securities without proper disclosures; i.e., that he owned them.
The action was one of at least ten incidents involving social media postings and which made headlines as these mediums were on the rise, underscoring now and again the need for securities industry members to implement social media policies and procedures.
This latest incident is a reminder that today’s means of communication are radically different and ever changing, but that still doesn't mean some old rules don't still apply.
Here's a refresher on testimonials and social media, taken from FINRA's website:
Creative Vision Meets Supervision
Firms must have the ability to supervise the business-related content that all associated persons are communicating on websites, including possible suitability determinations.
A registered principal must review the content prior to using 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
- A policy for how the firm will monitor these communications to test for compliance
- A policy for determining the types of actions will be taken if problems are detected
- Documentation of any findings and the corrective actions taken
The adoption of FINRA Rule 2210 (full text here) did not change the exceptions from the principal pre-use approval and filing requirements for posts in the interactive electronic forum portions of social media as compared to the requirements under NASD Rule 2210, which included as a communication category public appearances, defined to include participation in an interactive electronic forum.
NASD Rule 2210 did not require principals to approve public appearances prior to use, and did not require firms to file public appearances with FINRA.
FINRA Rule 2210 treats interactive electronic forum posts, such as social media status updates, as retail communications rather than public appearances; however, the rule specifically excludes these posts from both the principal pre-use approval requirements and the filing requirements. See FINRA Rules 2210(b)(1)(D)(ii) and 2210(c)(7)(M). Accordingly, these exceptions have not changed with respect to posts on interactive electronic forums, despite the fact that they are no longer considered public appearances for purposes of the rule.
Recent employment law decisions suggest that simply banning the use of social media may conflict with certain employee rights. The SEC encourages firms to develop a social media policy solely for compliance because existing advertising and marketing policies may not accurately and consistently address the unique risks presented by social media communications. Firms should tailor their policies to their specific needs.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.