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FINRA Provides Guidance on Social Media Web Sites

Published February 25, 2010

In September 2009, the Financial Industry Regulatory Authority, Inc. (“FINRA”) organized a Social Networking Task Force to discuss how social media sites can be used for legitimate business purposes by firms and their registered representatives in a manner that ensures investor protection. In January 2010, FINRA issued Regulatory Notice 10-06 to guide firms on applying FINRA’s communications rules to social media sites like blogs and social networking sites.


Under Securities Exchange Act of 1934 (the “1934 Act”) Rules 17a-3 and 17a-4 and NASD Rule 3110, every firm that intends to communicate or permit its associated persons to communicate through social media sites must ensure that it can retain records of those communications. The content of the communication is determinative for purposes of record retention and a broker-dealer must retain those electronic communications that relate to its “business as such.”


NASD Rule 2310 requires that a broker-dealer determine whether a recommendation is suitable for every investor to whom it is made. Whether a communication constitutes a “recommendation” under this rule is contingent upon the facts and circumstances surrounding the communication. Firms must adopt policies and procedures reasonably designed to address communications that recommend specific investment products. Unless a registered principal has previously approved the content, firms should consider the prohibition of all interactive electronic communications that recommend a specific investment product or any link to such a recommendation. Alternatively, firms may consider prohibiting communications that recommend a specific investment product unless the communication conforms to a pre-approved template and the recommendation was approved by a registered principal.


Under NASD Rule 2210, the definition of “public appearance” includes unscripted participation in interactive electronic forum like chat rooms and online seminars. Rule 2210’s treatment of blogs depends on the manner and purposes for which the blog was constructed. Blogs consisting of static content, such as profile, background or wall information, posted by the blogger constitute “advertisements” under Rule 2210. If a firm or its registered representatives sponsors such a blog, it must obtain prior principal approval of any posting. If the blog is used to engage in real-time interactive communications, such as interactive posts on Twitter, the blog is considered an interactive electronic forum that does not require principal approval, but must be supervised. When social networking sites contain both static and interactive content, a registered principal of the firm must still approve all static content before it is posted. However, the real-time communications are not required to have the approval of a registered principal prior to use, although supervision of these communications is still required.


Under NASD Rule 3010, firms must supervise interactive electronic communications in a manner reasonably designed to ensure that they do not violate the content requirements of FINRA’s communications rules. Firms must have policies and procedures for the review by a supervisor of employees’ internal, incoming, and outgoing electronic communications that trigger review under NASD rules and the federal securities laws, including NASD Rule 2711(b)(3)(A) and NYSE Rule 472(b)(3); NASD Rule 3070(c), NYSE Rule 351(d), and NYSE Rule 401A; and NASD Rule 3110(j) and NYSE Rule 410.


Generally, NASD Rule 2210 is not triggered by the posts of customers or other third parties. However, third-party posts become attributable to a firm when the firm (1) has involved itself in the preparation of the content (the “Entanglement Theory”) or (2) has endorsed the approved content either explicitly or implicitly (the “Adoption Theory”). If a firm uses a disclaimer to inform customers that third-party posts do not reflect the firm’s views and have not been reviewed for completeness or accuracy by the firm, FINRA will consider the disclaimer part of the facts and circumstances in analyzing whether a firm had entangled or adopted a posting. Firms must prohibit associated persons from engaging in business communications in a social media site that is not subject to the firm’s supervision. Additionally, firms must require that only associated persons who have appropriate training on the firm’s policies and procedures regarding interactive electronic communications engage in said communications.

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