Social media sites are transforming not only the daily lives of consumers, but also how companies interact with consumers. Here at Morrison Foerster, across all of our practice groups, we are seeing complex, cutting-edge legal issues arising out of social media. As with the Internet boom during the mid-to-late 1990s, social media is generating new legal questions at a far faster pace than the law’s ability to provide answers to such questions. In an effort to stay on top of these emerging issues, and to keep our clients and friends informed of new developments, Morrison Foerster publishes this blog devoted to the law and business of social media.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Aaron is the chair of the firm’s Technology Transactions Group and co-chair of the Interactive + Digital Media Group. He advises clients on a wide range of complex transactions involving intellectual property and technology, including structuring and negotiating strategic licensing, development, collaboration, procurement, and distribution deals.Aaron’s practice focuses on advising both established and emerging companies in a variety of data- and technology-intensive sectors, including software, SaaS, cloud-based technology, digital media (social media, AR/VR, gaming, streaming media, AdTech), AI, healthcare, consumer electronics, e-commerce, other online business models, and mobile applications. He also maintains an active practice counseling companies on branding and marketing, trademark licensing, and content-related transactions, as well as the intellectual property aspects of mergers, acquisitions, asset spin-offs, and private equity investments.He has represented clients such as Autodesk, Meta, OpenAI, Splunk, Konami, Kaiser Permanente, SoftBank, Visa, and Yahoo, among others.Aaron has been recognized by numerous publications for his work on market-defining technology transactions. He is currently ranked by Chambers USA for “Technology Transactions.”Aaron also serves as co-editor of Socially Aware, the firm’s award-winning newsletter and blog devoted to the law and business of social media, and regularly publishes on various IP and technology-related topics. Aaron is also a sought-after speaker on new and emerging areas of law, and is a frequent presenter and panelist at conferences and legal services programs. In addition to his active practice, Aaron regularly provides pro bono assistance to various nonprofit and charitable organizations such as Common Sense Media and the Starlight Children’s Foundation. He is a member of the board of directors of California Lawyers for the Arts.While in law school at the University of California, Berkeley, Boalt Hall School of Law, Aaron served as executive editor of the California Law Review and was elected to the Order of the Coif. Following law school, Aaron served as law clerk to the Honorable William H. Orrick and the Honorable Martin J. Jenkins, both United States District Judges for the Northern District of California.

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Aaron is the chair of our Technology Transactions Group. He advises clients on a wide range of complex transactions involving intellectual property and technology, including structuring and negotiating strategic licensing, development, collaboration, procurement, and distribution deals. Aaron’s practice focuses on advising both established and emerging companies in a variety of data– and technology–intensive sectors, including software, SaaS, cloud computing, AR/VR, AI, gaming, healthcare, consumer electronics, social media, e–commerce, other online business models, and mobile applications. He also maintains an active practice counseling companies on the intellectual property aspects of mergers, acquisitions, asset spin–offs, and private equity investments.

Aaron P. Rubin

Lawrence Gallick is of counsel in the firm’s Austin office and a member of the Technology Transactions Group.Lawrence focuses his practice on technology transactions and licensing matters. His diverse experience includes advising on SaaS agreements, cross-licensing agreements, research and collaboration agreements, development agreements, and distribution agreements. He counsels a broad range of companies across the software, hardware, life sciences, biotech and FinTech spaces, as well as other entities including universities.He advises clients in connection with general corporate matters including contract negotiations, and leasing and technology placement agreements.Lawrence also serves as co-editor of <a href="https://www.sociallyawareblog.com/" target="_blank">Socially Aware</a>, the firm’s award-winning newsletter and blog devoted to the law and business of social media, and regularly publishes on various IP and technology-related topics.Prior to joining the firm, Lawrence was counsel at another major law firm. Before earning his law degree, Lawrence was a web consultant, project manager, and web developer in Portland, Oregon, where he managed and consulted on projects using industry methodologies and performed custom development and integration of content management systems.Lawrence was named a Super Lawyers “Rising Star” in 2015 and 2018–2022, and is licensed in both California and New York. Lawrence earned his J.D. from the University at Buffalo School of Law, where he was the electronic systems editor for the Buffalo Law Review and awarded the ABA-BNA Award for Excellence in the Study of Intellectual Property Law.

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Lawrence Gallick

Anthony Ramirez is a partner in the Technology Transactions Group in the New York office of Morrison Foerster.Anthony advises clients on general commercial and transactional matters. He regularly advises companies on the IP aspects of their M&A transactions. His clients include technology, digital media and content for television and music, financial services, and communications companies with diverse intellectual property assets and issues.His practice focuses on the legal aspects of developing, licensing, and commercializing technology and intellectual property, as well as negotiating general commercial contracts, including outsourcing transactions, as well as content and data licenses. He regularly assists clients with legal issues relating to licensing and commercialization of digital media and content, digital content that is distributed over the Internet or streamed, mobile applications and social media, as well as the licensing of recorded music for distribution via digital platforms. Anthony is also experienced with issues relating to open-source software, software development, artificial intelligence and machine learning, cloud-based technology, and protection of proprietary information.Anthony has extensive experience working on matters involving disruptive technologies, such as blockchain. He has helped fintech clients with general intellectual property issues in connection with terms of service for online financial products and services.Anthony is an integral part of the outside pro bono legal team for nonprofit organizations based in New York, including advising clients on legal issues regarding entertainment, social media, privacy rights, and the negotiation of outsourcing and service agreements. Anthony received his J.D. from the University of Michigan Law School in 2009. He received his B.S. from Cornell University in 2004.

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Anthony Ramirez is a partner in the Technology Transactions Group in the New York office of Morrison Foerster. He advises clients on general commercial and transactional matters. His clients include technology, media, and communications companies with considerable intellectual property assets. His practice focuses on the legal aspects of licensing and commercializing technology and intellectual property, as well as negotiating general commercial contracts. He also regularly assists clients with legal issues relating to mobile applications and social media.

Anthony M. Ramirez

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Socially Aware is devoted to the law and business of social media, proactively addressing emerging issues and keeping our clients informed of new developments. We cover fields such as artificial intelligence, privacy and data security, Section 230, intellectual property, and much more.

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Lawrence W. Gallick

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Broker-dealers have been reluctant to fully embrace social media due to regulatory concerns. Although the industry regulator, the Financial Industry Regulatory Authority, Inc. (“FINRA”), has issued regulatory notices relating to the use of social media and the application of <a href="http://www.finra.org/industry/advertising-regulation" target="_blank" rel="noopener">FINRA Rule 2210</a> (Communications with the Public), many gray areas have remained, dampening the use of Facebook, LinkedIn and other social media platforms by industry participants.FINRA’s recent release of <a href="http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-18.pdf" target="_blank" rel="noopener">Regulatory Notice 17-18</a> may help to remedy that problem, however. Presented in the form of 12 FAQs commenting on the earlier regulatory notices, this latest notice provides the broker-dealer industry with greater guidance on its use of social media to communicate with customers and potential customers. Specifically, the FAQs expand on the areas of recordkeeping, third-party posts and the use of hyperlinks to third-party sites. FINRA acknowledged that the use of social media and digital communications has expanded in the time since its last regulatory notice on the use of social media by member firms, which was <a href="https://www.finra.org/sites/default/files/NoticeDocument/p123794.pdf" target="_blank" rel="noopener">Regulatory Notice 11-29</a>, issued in 2011.Recordkeeping The requirement that member firms retain records of communications that relate to their “business as such” under <a href="https://www.law.cornell.edu/cfr/text/17/240.17a-4" target="_blank" rel="noopener">Rule 17a-4(b) of the Securities Exchange Act of 1934</a> applies to digital communications, including those that are made through text messaging and chat services, if the content of the communication relates to the firm’s business. Before using such services, the firm must first ensure that it can retain those business communications.Personal Versus Business Communications Information or links to content shared by an associated person of a member firm that do not relate to the products or services of the member firm are not subject to Rule 2210.Adoption of or Entanglement with Outside Content Generally, a third-party post on a social media site established by a firm or any of its personnel would not be considered a communication by the firm or its personnel and to which the Rule 2210 requirements would not apply. However, <a href="http://www.finra.org/sites/default/files/NoticeDocument/p120779.pdf" target="_blank" rel="noopener">under certain circumstances</a>, FINRA has viewed third-party posts as becoming attributable to the firm and considered communications with the public subject to Rule 2210. For example, after the third-party content was posted, if the firm or its personnel explicitly or implicitly endorsed or approved the post, then, under an adoption theory, the post would constitute a communication with the public by that firm. Or, if the firm or any of its personnel involved themselves in the preparation of the content of the third-party post, or paid for the post, then the third-party post would be considered to be a communication with the public by the firm or its personnel under an entanglement theory.FINRA discussed the adoption of third-party content by the member firm in several contexts:<ul><li>sharing or linking to specific content posted by independent third parties is an adoption of that content by the member firm; in that case, the member firm must ensure that the adopted content, when read in context with the statements in the originating post, complies with Rule 2210’s standards applicable to firm communications;</li></ul><ul><li>sharing or linking to content that in turn links to other content, if the member firm has influence or control over that other content, is an adoption by the member firm of that other content; and</li></ul><ul><li>sharing or linking to content that itself is primarily a vehicle for other links, or where the content available through such links forms the entire basis of the article, is an adoption by the member firm of the content accessed through such links.</li></ul>The FAQs clarify that simply sharing or linking to content that contains links to other content over which the member firm has no influence or control is not an adoption by the member firm of the content available at those other links.If a member firm includes on its website a link to a section of an independent third-party site, whether or not the member firm has adopted the content of the other site will depend on whether the link is “ongoing” or if the member firm has influence or control over the content of the third-party site. In the latter case, the third-party content will become attributable to the member firm through an entanglement theory.Content at a linked site will not be adopted by the member firm if the link is ongoing, which means that:<ul><li>the link is continuously available to investors who visit the member firm’s site;</li></ul><ul><li>investors have access to the linked site whether or not it contains favorable material about the member firm; and</li></ul><ul><li>the linked site could be updated or changed by the independent third-party, and investors would still be able to use the link at the member firm’s site.</li></ul>Nonetheless, if the firm has any influence or control over the content of the third-party site, the content of that site will be attributable to the firm through an entanglement theory. Any language used by the member firm to introduce the link must conform to the content standards of Rule 2210(d).If a member firm contacts a third-party publisher of an online business directory that includes information about the member firm or its registered representatives to correct factual information in the listing, and the listing was not made at the direction of the member firm or representative, then the corrected information would not be a communication by the member firm. If the firm posted a comment on the directory’s site to correct the information, the comment would not be deemed an adoption of the original, incorrect information.Native Advertising Those advertisements that magically pop up and try and sell you something relating to the subject matter you are reading about on the internet (“native advertisements”) may be employed by member firms, provided that they comply with Rule 2210’s requirements, including that all communications must be fair, balanced and not misleading. Native advertisements must also prominently disclose the member firm’s name, disclose any relationship between the firm and any other entity or individual who is named and disclose whether any products or services touted are offered by the member firm, all in compliance with Rule 2210(d)(3).Paid Comments or Posts Comments or posts paid for or arranged by a member firm are communications attributable to that firm under an entanglement theory. Consequently, any such post or comment should be clearly labeled as an advertisement by the member firm and include the firm’s name as well as any other information required by Rule 2210.Testimonials and Endorsements Unsolicited third-party opinions or comments posted on a business related site supervised and retained by a member firm or its registered representative are not communications of the firm or the registered representative for purposes of Rule 2210, nor are such unsolicited opinions or comments considered to be testimonials subject to the requirements of Rule 2210(d)(6).However, if a representative of the member firm “likes” or shares on a blog or social networking site favorable comments posted by third parties on the business-related site, then the comments would be adopted by the firm or its representative and would be subject to Rule 2210, including the content, supervision, recordkeeping and testimonial requirements. Disclosure of the testimonial requirements of Rule 2210(d)(6) may be made either in the interactive electronic communication itself, in close proximity to the testimonial or through a clearly marked hyperlink using language such as “important testimonial information.” Testimonials may not be false, misleading, exaggerated or promissory.FINRA also reminded firms registered under the Investment Advisers Act of 1940 about the <a href="https://www.law.cornell.edu/cfr/text/17/275.206(4)-1" target="_blank" rel="noopener">prohibitions against</a> fraudulent, manipulative or deceptive acts or the use of any advertisement that refers to a testimonial concerning an investment adviser or any advice, analysis, report or other service rendered by the investment adviser.BrokerCheck Member firm-created apps are not subject to the requirement to include a readily apparent reference and link to FINRA’s BrokerCheck because Rule 2210(d)(8) specifically references firm websites. However, if the member firm-created app accesses and displays a webpage that is on the firm’s website, and that is required to include the BrokerCheck link, the firm must ensure that the link is readily apparent when that page is displayed through the app.Conclusion In the six years since FINRA’s last regulatory notice on the use of social media, the digital landscape has changed at lightning speed and continues to evolve rapidly. Regulatory Notice 17-18 will help FINRA members and their registered representatives understand FINRA’s current approach to digital communications and which activities will fall within the scope of Rule 2210.*             *             *For more information about social media and financial regulations, please see the following Socially Aware articles: <a href="https://www.sociallyawareblog.com/2015/06/23/the-guide-to-social-media-and-securities-law/" target="_blank" rel="noopener">The Guide to Social Media and Securities Law</a>;  <a href="https://www.sociallyawareblog.com/2012/07/10/the-social-media-experiment-challenges-for-broker-dealers-and-investment-advisers/" target="_blank" rel="noopener">The Social Media Experiment: Challenges for Broker-Dealers and Investment Advisers</a>; <a href="https://www.sociallyawareblog.com/2014/01/07/ffiec-issues-final-guidance-on-social-media-usage-by-financial-institutions/" target="_blank" rel="noopener">FFIEC Issues Final Guidance on Social Media Usage by Financial Institutions</a>; <a href="https://www.sociallyawareblog.com/2015/03/26/uks-financial-services-regulator-no-hashtags-in-financial-promotions/" target="_blank" rel="noopener">UK’s Financial Services Regulator: No Hashtags in Financial Promotions</a>; and <a href="https://www.sociallyawareblog.com/2014/08/26/uks-financial-services-regulator-issues-draft-guidance-on-social-media-should-we-favorite-or-fail/" target="_blank" rel="noopener">UK’s Financial Services Regulator Issues Draft Guidance on Social Media—Should We Favourite* or #Fail?</a>

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FINRA Publishes New Guidance on Social Networking Websites and the Application of Rule 2210

FINRA Publishes New Guidance on Social Networking Websites and the Application of Rule 2210

Broker-dealers have been reluctant to fully embrace social media due to regulatory concerns. Although the industry regulator, the Financial Industry Regulatory 

Acknowledging the growing demand by consumers for information through social media, the Division of Investment Management set some ground rules on how investment advisers can use social media and publish advertisements featuring public commentary about them from social media sites.Under the new rules, investment advisers may refer to commentary published in social media without violating the rule prohibiting publication of client “testimonials” if the content is independently produced and the adviser has no “material connection” with the independent social media site. While not a bright line in the sand, the distinction goes a long way to clear up this murky area of the law.BackgroundThe growing use of social media by consumers has created challenges for federal securities regulators, who must enforce antifraud rules that were written at a time when the prevailing technology was the newspaper.Section 206 of the Investment Advisers Act of 1940 contains broad antifraud provisions that apply to advisers. Rule 206(4)-1(a)(1) under the Advisers Act defines fraud to include “any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service” provided by the adviser. This is the so-called “testimonial rule.” In a 1985 no-action letter, the Division of Investment Management staff said that the basis of the prohibition is that a “testimonial may give rise to a fraudulent or deceptive implication, or mistaken inference, that the experience of the person giving the testimonial is typical of the experience of the adviser’s clients.”While the SEC’s rules do not define the term “testimonial,” the SEC’s staff has indicated that public commentary made by a client endorsing an investment adviser, or a statement made by a third party about a client’s experience with the adviser, may be a testimonial for this purpose. And, as the guidance notes, whether public commentary on a social media site constitutes a testimonial depends on the facts and circumstances relating to the statement.In the age of social media, this decades-old rule presents enormous compliance challenges for advisers whose clients rely on social media.Over the years, the staff, through the “no-action” process, has provided limited guidance on what constitutes a testimonial. For example, the staff has said that publication of an article by an unbiased third party regarding an adviser’s performance, unless it includes a statement of a client’s experience with the adviser, or an endorsement of the adviser, would not violate the testimonial rule. The staff has used this concept as the basis for its current guidance.GuidanceThird-party commentary. The staff attempted to draw a line between endorsements and legitimate third-party commentary:<ul><li>Advisers may not publish public commentary on their website that is an explicit or implicit statement of a client’s experience with the adviser. <ul><li>Commentary posted directly on the adviser’s website, blog, or social media site that touts the adviser’s services are prohibited testimonials.</li></ul></li><li>Advisers won’t necessarily violate the testimonial rule if they publish commentary originating from an independent social media site on their own websites or social media sites, provided: <ul><li>The independent social media site provides content that is independent of the investment adviser or its representative;</li><li>There is no material connection between the independent social media site and the investment adviser or its representative that would “call into question the independence” of the independent social media site or its commentary; and</li><li>The investment adviser or representative publishes all of the unedited comments appearing on the independent social media site regarding the adviser or representative.</li></ul></li><li>Content is not “independent” if the adviser or its representative had a hand in authoring the commentary, directly or indirectly. For example, paying a client (or offering a discount to a client) for saying nice things would implicate the testimonial rule.</li><li>Advisers may not use testimonials from independent social media sites that directly or indirectly emphasize commentary favorable to the adviser, or downplay unfavorable commentary.</li><li>Advisers may publish commentary from an independent social media site that includes a mathematical average of the public commentary—for example, based on a ratings system that is not pre-ordained to benefit the adviser.</li></ul>Investment adviser advertisements on independent social media sites.<ul><li>Investment advisers may advertise on an independent social media site, provided that it is readily apparent that the advertisement is separate from the public commentary, and that the receipt of advertising did not influence the selection of public commentary for publication.</li></ul>Reference to independent social media site commentary in non-social media advertisements.<ul><li>In print, TV, and radio ads, advisers may refer to the fact that third-party social media sites feature public commentary about the adviser, but they may not publish any actual testimonials without implicating the testimonial rule.</li></ul>Client lists on social media sites.<ul><li>Simply identifying contacts or friends on a social media site by itself does not implicate the testimonial rule, as long as they are not grouped in a way that suggests that they endorse the investment adviser.</li></ul>Fan and community pages.<ul><li>A third party’s creation and operation of unconnected community or fan pages generally would not implicate the testimonial rule. However, the staff strongly cautions advisers and their employees that publishing content from those sites or directing user traffic to those sites if they do not meet the no material connection and independence conditions described above may implicate the testimonial rule.</li></ul>Our TakeThe Division of Investment Management’s approach to regulating the use of social media by advisers differs markedly from the approach adopted by FINRA for broker-dealers. While both regulators focus on the substance of the communication, rather than the format, the differences arise primarily from the nature of the regulated entity and the starting point of regulation.For example, the Division of Investment Management focuses almost exclusively on adequacy of compliance programs, and whether a particular use of social media involves a prohibited “testimonial,” a concept largely absent from regulation of broker-dealers. On the other hand, FINRA focuses on suitability of a recommendation and whether a particular communication requires advance compliance approval. Both approaches require caution when a regulated entity publishes or relies on third-party content.The Division of Investment Management’s guidance moves the ball forward, and will provide a starting point for chief compliance officers who are struggling to get their arms around advisers’ use of social media. It may also provide an opportunity for advisers to revisit their procedures for monitoring advertising. While the guidance provides some relief for advisers who now have a better idea of the limitations to which they are subject, it also provides some compliance challenges, especially when advisers and their representatives make use of fast-paced social media to advertise.

New Regulatory Guidance on Use of Social Media by Investment Advisers

Acknowledging the growing demand by consumers for information through social media, the Division of Investment Management set some ground rules on how investmen

New Regulatory Guidance on Use of Social Media by Investment Advisers

The <a href="http://www.reuters.com/article/2011/05/25/us-morganstanley-socialmedia-idUSTRE74O4NF20110525">announcement</a> by a Wall Street firm that it plans to give its financial advisers limited access to social media websites has been viewed by many as inevitable.  Morgan Stanley’s foray into the fast-changing world of social media highlights the difficulties faced by broker-dealers and investment advisers and the regulators who oversee them.  As more financial firms follow suit, regulators will struggle to enforce securities laws that were written when the telephone and the telegraph were the prevailing social media.Federal securities laws require broker-dealers and investment advisers to comply with a panoply of detailed rules designed to ensure that customers and clients are not misled.  The rules require them to keep records of every paragraph, sentence, and word—and now, every tweet.The challenge:  how can financial firms comply with these strict rules while satisfying the market’s growing passion for communicating by texts and tweets?  And how can regulators enforce two-dimensional securities laws in the new three-dimensional world?The exponential jump in social media usage has attracted the attention of federal securities regulators, who have responded with additional guidance and enforcement actions.The Financial Industry Regulatory Authority (FINRA), which regulates broker-dealers, published guidance on blogs and social networking websites in January 2010.  This was followed by guidance on social networking websites and business communications, posted in August 2011.In January 2012, the U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) published a National Examination Risk Alert called Investment Adviser Use of Social Media, which outlines in stark terms the SEC staff’s compliance concerns on the use of social media by registered investment advisers.While investors typically do not distinguish between broker-dealers, on one hand, and registered investment advisers, on the other hand, these two types of financial institutions are regulated under similar, but very different, sets of rules.  Social media use by investment advisers that are dually registered with the SEC and with FINRA is subject to both sets of rules and interpretations.Investment advisers.The SEC has recognized that social media is “landscape-shifting” and that its use by the financial services industry is rapidly accelerating.The SEC staff has stated its view that use of social media to communicate with clients and prospective clients may implicate Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (Advisers Act), which governs advertisements by investment advisers.This rule, in relevant part, provides that an investment adviser will violate the Advisers Act’s anti-fraud provisions if it publishes, circulates, or distributes “any advertisement” that:<ul><li>Refers, directly or indirectly, to “testimonials of any kind concerning the investment adviser” or the investment advice it provides;</li><li>Refers, directly or indirectly, to past specific recommendations it provided (e.g., “cherry picking”), unless the adviser discloses a list of all recommendations, subject to certain requirements;</li><li>Represents that a graph, chart, or formula, by itself, can be used to determine which securities to buy, without prescribed disclosures;</li><li>Contains a statement to the effect that a report, analysis, or other service will be furnished free of charge, unless it is actually provided entirely free of charge without condition; or</li><li>Contains any untrue statement of a material fact, or that is otherwise false or misleading.</li></ul>The SEC defines “advertisement” very broadly.  “Advertisements” include, in relevant part, any notice, circular, letter, or other written communication addressed to more than one person, or any notice or announcement in any publication or by radio or television, that (1) offers analysis, report, or publication concerning securities, or that is to be used in making any determination as to when to buy or sell any security, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or (3) any other investment advisory service with regard to securities.While this regulatory definition reflects technological advancements through and including the cathode ray tube television set, we can reasonably conclude that it applies to all kinds of social media communications, including blogs, wikis, photo and video sharing, podcasts, social networking, and virtual worlds.OCIE’s regulatory concerns can be categorized into three broad categories:  compliance policies and procedures, third-party content, and record keeping.Compliance programs.  First, the SEC staff is concerned that investment adviser compliance programs may include overlapping procedures that apply to advertisements and communications but do not specifically include social media.  The staff urges investment advisers to evaluate the effectiveness of their compliance programs with respect to the use of social media by the firms themselves, their representatives, or solicitors, including the following hot buttons:<ul><li>Usage guidelines.  Compliance procedures should address appropriate usage and restrictions on use of social media, based on potential risks.</li><li>Content standards. Content may implicate fiduciary duties or other regulatory issues, which compliance procedures should address.</li><li>Monitoring.  Advisers should consider how to monitor use of social media by employees, representatives, and solicitors, and should take into consideration the lack of ability to monitor third-party sites.</li><li>Frequency of monitoring.  The staff suggests a risk-based approach for frequency of monitoring of social media communications.</li><li>Approval of content.  Advisers should consider pre-approval of communications, rather than after-the-fact reviews.</li><li>Firm resources.  Advisers should evaluate their resources to ensure that they are sufficient to adequately monitor personnel and archive communications.</li><li>Criteria for approving participation.  Compliance procedures should assess risks to the adviser, including operational, reputational, privacy, and other regulatory issues.</li><li>Training.  Advisers should consider implementing a training program related to social media, with a view toward promoting compliance.</li><li>Certification. Consider procedures that require personnel to certify that they understand and will comply with social media policies.</li><li>Functionality. Advisers should consider the functionality of social media sites approved for use, including the continuing obligation to address any upgrades or modifications.</li><li>Personal/professional sites.  Advisers should consider whether to adopt policies to address business conducted on personal or third-party media sites.</li><li>Information security. Advisers should consider whether permitting representatives to have access to social media sites poses information security risks, and how to protect information.</li><li>Enterprise-wide sites.  Advisers that are part of a larger financial services or corporate enterprise may consider creation of usage guidelines designed to prevent the advertising practices of a firmwide social media site from violating the Advisers Act.</li></ul>Third-party content.   Second, the staff has indicated that third-party content on social media sites presents special compliance challenges.  These issues arise when third parties post messages, forward links, or post articles to an adviser’s website or in social media sites.  Adviser representatives and solicitors generally do not interact with these third parties or respond to their postings.The staff noted its concern about direct or indirect testimonials “of any kind.” The SEC’s rules do not define the term “testimonial,” but the SEC’s staff broadly interprets the term to include a statement of a client’s experience with, or endorsement of, an investment adviser.  Therefore, the use of “social plug-ins,” even when a third party hits the “Like” button on an adviser’s Facebook page could be a “testimonial” under the Advisers Act if the “Like” represents an explicit or implicit statement of a client’s experience with an investment adviser or its representative.The staff’s concerns underscore the challenges that investment advisers face when the use of freewheeling, interactive social media collides with requirements to comply with pre-Internet regulations that were designed to regulate newspaper and magazine advertisements.Recordkeeping.  The SEC’s third area of concern is recordkeeping obligations of advisers.  OCIE noted that the recordkeeping rules do not differentiate between traditional paper communications, like snail mail, and electronic communications, such as emails, instant messages, and other ways that investment advisers provide advisory services.  In other words, the federal regulators focus on the content of the communication, rather than its form.  OCIE urges investment advisers to ensure that their recordkeeping policies and procedures allow advisers that use social media to comply with the recordkeeping requirements.In January 2012, the SEC published an Investor Alert, Social Media and Investing: Avoiding Fraud, designed to make investors aware of fraudulent investment schemes that use social media.  It also provides tips for checking the backgrounds of investment advisers and brokers.  An Investor Bulletin, Social Media and Investing, Understanding Your Accounts provides tips for investors who use social media about privacy settings, security, and password selection.Also in January 2012, the Enforcement Division announced that the SEC charged an Illinois-based investment adviser with offering to sell fictitious securities on LinkedIn.  Among other things, the Division alleged that the adviser used LinkedIn discussions to promote fictitious “bank guarantees” and “medium term notes,” which generated interest from potential investors.  The adviser failed to comply with recordkeeping requirements or maintain a required Code of Ethics.The SEC’s Enforcement Division noted that fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes.  This case suggests that the federal regulators are determined to adapt to new technologies to follow the fraud.Broker-dealers.As long ago as 1999, FINRA recognized the potential compliance issues posed by use of social media when it stated that a registered representative’s participation in an Internet chat room is subject to the same requirements as a presentation in person before a group of investors.  FINRA codified this guidance in 2003, when it defined the term “public appearance” to include participation in an interactive electronic forum.FINRA published its Guide to the Internet for Registered Representatives, and in September 2011, it released a three-part series of podcasts on these issues to educate broker-dealers and their representatives.FINRA is not so much concerned about the form of a communication from a registered representative; rather, it is concerned about the content of the communication and whether the registered representative obtained prior supervisory approval for sending the communication.  FINRA penalized a registered representative who posted 32 tweets touting a particular security without prior principal approval, among other alleged violations.For a summary of recent FINRA concerns about social networking, see our August 3, 2011 News Bulletin, FINRA to Issue More Guidance on Social Media.The Morgan Stanley initiative.  The New York Times DealBook reported on June 25, 2012 that, after a yearlong trial program, Morgan Stanley planned to give about 17,000 financial advisers “partial access” to Twitter and LinkedIn.  But don’t expect their registered representatives to get carried away with a flurry of on-the-fly stock picks.  The representatives draw posts “from a prewritten library” of Twitter messages and submit all LinkedIn postings for approval, using advanced software designed for this purpose.  Other firms likely will follow suit and devote more resources to developing this latest frontier of communications with customers.Not only did Morgan Stanley give the green light to its financial advisers to post limited tweets, but, on the firm’s official Twitter account, senior Morgan Stanley economists recently tweeted their analysis of the U.S. jobs report and the European Central Bank’s decision to lower interest rates.This initiative signals a trajectory and confirms that the financial services industry’s use of social media is here to stay.  And it is a somber reminder that, notwithstanding advances in communications technology, firms must still comply with pre-Internet federal securities laws covering anti-fraud, advertising, and record-keeping.Conclusion. The exponential growth of the use of social media presents compliance and operational challenges for investment advisers and broker-dealers.  Regulators are devoting more and more resources as they scramble to stay current with technological advances in this area.  Financial services firms are well advised to assess how their customers and employees use social media, to evaluate the potential risks, and to ensure that their policies and procedures adequately address the increasingly complex compliance and operational issues arising from the soaring popularity of social media.

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The Social Media Experiment: Challenges for Broker-Dealers and Investment Advisers

The Social Media Experiment: Challenges for Broker-Dealers and Investment Advisers

The announcement by a Wall Street firm that it plans to give its financial advisers limited access to social media websites has been viewed by many as inevitabl