As social media sites have become more popular with the general public, advisors have been drawn to them. But firms have generally banned their use because of advertising restrictions, and the lack of clear guidance from the regulators as to their use. That partially changed in January, with FINRA's release of Regulatory Notice 10-06-Guidance on Blogs and Social Networking Web Sites. The notice dealt with five main areas.

Supervision and Approval

FINRA has said that firms must adopt policies and procedures reasonably designed to ensure that brokers who use social media sites for business purposes are appropriately supervised, have the necessary training and background to engage in such activities, and do not present undue risks to investors. Firms also must require only those employees who have been trained on the firm's policies on this issue to engage in such communications.

Archival and Retention

Every firm that permits its brokers to communicate through social media must retain the records of those communications as required by existing SEC and NASD rules that require a broker-dealer to retain electronic communications that relate to its "business as such." That means that all communications, including the profile page on sites such as LinkedIn and Facebook, as well as all updates, must be stored for no less than three years.

Suitability Responsibilities

This aspect of the Notice is a non-starter. Given a broker's suitability obligations under Rule 2310, it is virtually impossible to have a compliant recommendation on the Internet. The solution is that brokers and advisors cannot make a recommendation of a particular investment or strategy using social media.

Static vs. Interactive

Social networking sites have two components: static content and interactive functions. And each presents a different supervisory and regulatory issue.

Static content at these sites will be treated like a webpage, and a principal of the firm must approve all static content before it is posted. But social networking sites also contain non-static, real-time communications, such as network updates on LinkedIn, and "tweets" on Twitter. A question exists as to whether these are like chat room discussions, which do not require pre-approval, but do require supervision.

Although tweets and status updates are not email, FINRA's notice permits firms to supervise those messages in the same manner as email. The release states that firms may adopt supervisory procedures similar to those outlined for email as set forth in Regulatory Notice 07-59. That notice provides that firms may employ risk-based principles to determine the extent to which the review of incoming, outgoing and internal electronic communications is necessary for the proper supervision of their business. Allowing firms to treat tweets like email, and permitting firms to decide the best practice for their own business model, is a significant step. Some firms will continue to ban updates and tweets, but others will use software similar to that used to monitor email, and allow their brokers to use Twitter.

Third-Party Content

While FINRA does not generally consider third-party posts at websites as a firm's communications, it can be construed that way if the firm or advisor are: 1) involved in the preparation of the content, or 2) explicitly or implicitly approving the content.

This presents a unique problem on social media sites, as the disclaimers and caveats used at firm websites may not be available on social media sites. Third-party posts, and in particular the recommendation feature of LinkedIn have the potential to violate these rules. We expect to see a flurry of audits and related actions as exams move forward during the next year on social media use by brokers and advisors.