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Social Media Compliance Overview

October 19, 2021

By: Jennifer DiValerio, Managing Director

The financial services industry has seen a tremendous increase in social media as a marketing tool.   Firms and their registered representatives are actively leveraging social media to build brand awareness, attract and gain followers, and obtain a competitive advantage.

Social media platforms are particularly powerful channels of communication and can be of significant value to firms.  While this innovation is noteworthy, getting it wrong could mean significant regulatory fines, reputational damage, or personal risk.

As the use and popularity of social media platforms have increased, the regulatory attention focused on them has as well.  Understanding the regulatory and compliance framework will assist in utilizing social media platforms in a compliant manner.  While there are a number of regulatory requirements that need to be considered when using social media, such as rules and guidance by the Federal Trade Commission (“FTC”) and the Securities and Exchange Commission (“SEC”), for purposes of this guidance we will focus solely on Financial Industry Regulatory Authority (“FINRA”) Communications with the Public rules.

Firms should discuss with the Fund, Trust, or Advisor CCO and/or their internal compliance staff regarding additional policies and procedures that may apply to their social media activities.

FINRA Rule 2210 governs communications by FINRA member firms and their registered representatives.  This includes social media posts, comments, and related activities.  The Rule’s general content standards apply to all communications and are meant to ensure that communications are fair, balanced, and not misleading. In particular, the Rule requires all communications to provide a sound basis for evaluating the facts regarding any particular security and prohibits communications from omitting any material fact if the omission, in light of the context of the material presented, would cause the communications to be misleading

Social Media FAQ – Firms (Fund Sponsors or Issuers)

  • Can a firm use social media to market funds?

Response: Yes, social media may be used to market funds that can be marketed publicly.  Private unregistered funds that are not permitted to engage in general solicitation should not participate in social media marketing activities.  Firms may require approval from an Advertising Principal for fund-related marketing material utilized to incent interest in the purchase of a fund. This includes static and interactive posts.

  • What is the difference between fund-related and non-fund related content?

Response: Fund-related generally means any material that specifically references a fund name or ticker symbol or any material that is intended to promote a fund. This may include non-fund related content if an advisor does not offer other investment vehicles.  Non-fund related content would be any content that does not promote or would not be interpreted as having the intent to promote a fund. Non-fund related content would include generic news-related posts with no mention of a fund or product, or content that is purely social, such as wishing followers “Happy Holidays” or that your firm is sponsoring a charitable event or posting an employment opportunity.

  • What is the difference between static and interactive content?

Response: Social networking sites typically contain both static and interactive content. Static content remains posted until it is changed by the firm or individual who posted the material. Generally, static content is accessible to all audiences or visitors to a site. Examples of static content typically available through social media sites include profiles, backgrounds, or wall information.

Social networking sites such as Twitter and Facebook also allow for real-time interactive posts. Any portion of a social networking site that provides for these interactive communications constitutes an interactive electronic forum.

FINRA makes a distinction between static and interactive content. Static content, such as LinkedIn and Facebook profiles, are considered advertisements and should be pre-approved before being posted or used for business purposes.

  • Are fund-related interactive social media posts required to be filed with FINRA?

Response: Although exempt from FINRA filing requirements, the SEC has taken the position in Investment Management Guidance[1] that certain fund-related interactive content posted in a real-time electronic forum (i.e., chat rooms or other social media) must be filed with the SEC, if it is not filed with FINRA.

  • Can a firm pay for articles to promote funds on social media?

Response: If a firm has arranged for a comment or post to be made, FINRA would regard the firm as entangled with the resulting communication.  Entanglement equates to “If you touch it, you own it” and therefore subjects the comment or post to the Communications with the Public standards under FINRA Rule 2210, which in part, prohibit deceptive or misleading communications. Additionally, a firm would be required to prominently disclose that they compensated the individual (or firm) for the service.

Along similar lines, if a firm hires or engages an influencer to post an endorsement on behalf of a fund, then the fund firm is “entangled” in its creation. Why? The influencer (or author) is being paid by the firm or the firm has participated in the influencer’s messaging.  That means the firm has contributed to the creation of or otherwise has some impact upon on the post.

  • May firms pay or arrange for comments or posts by an individual (an “influencer”) that promote the firm’s brand, products or services?

Response: If a firm has paid or arranged for an individual or a firm to promote securities products, FINRA would regard the firm as entangled with the resulting communication and the communication must be clearly identified as an advertisement. FINRA regards this as information that is material to ensuring that such communications are not misleading. Therefore, any fund-related content used is subject to the Communications with the Public standards under FINRA Rule 2210, which in part, prohibit deceptive or misleading communications. Paying for, being involved in arranging for, directly or indirectly, the promotion of your firm’s securities products would be misleading if not properly disclosed.

Additionally, firms should discuss additional regulatory considerations with their firm’s compliance department, including but not limited to, conducting due diligence on the influencer; screening the background and knowledge of the influencer; considering appropriate contractual provisions; reviewing the post pursuant to applicable regulations; assessing the medium as well as regulatory retention; and supervisory obligations.

  • What if a third-party comments on a firm’s post? 

Response: Unsolicited third-party comments are not considered communications of a firm or a registered representative.  However, keep in mind that if a firm comments on the unsolicited post, then that would be adoption of the third-party comments and may trigger compliance obligations.

  • Can a firm use social media to link to a third-party website?

Response: A firm is responsible under FINRA’s Communications with the Public rules for content on a linked third party site if the firm has adopted or has become entangled with its content. 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 has adopted content if it has control, influence or its personnel explicitly or implicitly endorses or approves the post. Adopted content generally includes an analysis of facts and circumstances and may include (1) whether the link is “ongoing”, meaning that the link is continuously available for visitors to the site, (2) the link is available whether or not in contains favorable material about the firm, and (3) the linked site can be updated and is controlled by the firm.
  • A firm has become entangled with content if a firm or its personnel are involved in the preparation of the content of the third-party post or otherwise participates in the development or pays for (directly or indirectly) the content on the third-party site.
  • If a firm received approval for a fund-related Tweet to be posted on the firm’s approved Twitter page, can the same post be used on other social media sites?

Response: Firms must inform their compliance department of all intended uses of the material.  Communications across different sites may impact disclosure placement.

  • If a firm is a registered investment advisor, are there additional regulations that need to be considered?

Response: Advisors must also consider their obligations to comply with SEC and FTC regulations when using social media, including testimonials and endorsements.  This overview focuses on FINRA requirements and is meant to compliment an Advisor’s regulatory obligations.

  • Can a firm pay for advertisements that will be posted on social media sites?

Response: Paying for advertising is considered “native” advertising and is permitted, provided it is clear, conspicuous, and prominently indicated that the content is an advertisement. FINRA rules require certain content standards be met, such as not being misleading and being clearly marked as an advertisement.

  • Can a firm ask use testimonials or endorsements?

Response: From FINRA’s point of view, broker-dealers may use testimonials and endorsements in some specific circumstances and with proper disclosures.

Additionally, advisors will have to consider if the use of testimonials or referrals as part of fund social media advertisements is permitted by the SEC.

  • Is a firm permitted to maintain a LinkedIn, Twitter, or other similar profile page for business purposes?

Response: Firms are permitted to maintain Fund LinkedIn or Twitter profile pages.  Pages such as this contain static content, which include standard disclosures.

 

Social Media FAQ – Registered Representatives

  • If registered representatives are permitted to use social media, what does a Firm need to consider?

Response: First, registered representatives must receive permission from their firm to use social media for business communications. Firms are required to supervise all communications of a registered representative in a manner reasonably designed to ensure that the communications do not violate FINRA regulations, including the content standards of FINRA’s communication rules. Further, firms must ensure they are complying with recordkeeping requirements, and in some instances, suitability.

  • Can a Registered Representatives use social media to market funds?

Response: Yes, provided that a firm has adopted policies and procedures to address supervision, recordkeeping, and suitability obligations. Further, firms should implement robust training programs to ensure that Registered Representatives are informed on how they are permitted to use social media.

Further, no registered representative should promote on social media unregistered funds that are prohibited from engaging in general solicitation or general advertising.

  • Can a Registered Representative “like” a social media post?

Response: Liking general third-party content is not generally viewed as a communication of the Representative.  However, if a third-party posts a business-related comment on a registered representative’s account, and the registered representative subsequently “likes” the comment, the registered representative has adopted the content.  Adopted content is subject to the communications rules, including the prohibition on misleading or incomplete statements or claims, and the supervision and recordkeeping rules will apply.

  • Are registered representatives permitted to comment on a third-party post?

Response: Yes, registered representative are permitted to comment on third-party posts; however, registered representative must be mindful that commenting on such posts is considered adoption of the post, which, in the absence of additional context, should not be misleading, unbalanced, unwarranted, and promissory, or otherwise not present a clear picture of the potential risks of the investment.

If a registered representative’s employer is a Registered Investment Advisor, then there are current SEC regulations that prohibit and limit testimonials and endorsements; therefore, a Representative should also consult with their employer regarding any social media policy restrictions they may have.

  • Can a registered representative use social media to link to a third-party website?

Response: Yes, however if a registered representative explicitly or implicitly endorses or approves the post, then FINRA considers this an “adopted” post.  

  • If a registered representative utilizes a personal social media account for fund-related posts, does the firm need to journal these accounts?

Response: If a registered representative is using social media for business purposes, i.e., posting fund-related content (including material that is intended to incent the purchase of a fund), commenting on posts, or sharing approved marketing materials, regardless of how the account is registered, this use would be considered business related and would be subject to supervisory and recordkeeping obligations.

  • Is a registered representative permitted to utilize a pseudonym or otherwise anonymously communicate on social media platforms?

Response: Registered representatives are prohibited from utilizing a pseudonym or otherwise communicating in any manner that would seek to prevent a firm from meeting its regulatory obligations to supervise and maintain records of such activities.  Firms should ensure that registered representatives disclose all social media accounts, webpages, registrations, and usernames for any channel that is used for business purposes.

  • If a fund sponsor is thinking about allowing registered representative to use a new platform, what does it need to do?

Response: Prior to permitting registered representatives to use any platform, a firm must reach out to their compliance department to understand the platform’s functionality and how it will be used, as well as to its retention vendor to confirm the vendor has the ability to journal in real time to ensure that the firm has the ability to appropriately retain and supervise the communications.

  • Are there any platforms that Registered Representatives are prohibited from using?

Response: While there are no regulatory restrictions on any particular social media platform, registered representatives are not permitted to use apps, chats, and other technologies that allow individuals to send messages or otherwise communicate anonymously, that allow for the automatic destruction of messages, prevent an advertising principal approval from reviewing and approving prior to use or that prohibit third-party viewing or back-up.

 

 

[1] https://www.sec.gov/divisions/investment/guidance/im-guidance-update-filing-requirements-for-certain-electronic-communications.pdf

 

 

 

This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.