It is understood that compliance in the financial industry is one of the costs of doing business. Compliance covers all areas of business and is designed to protect both the financial planner and their clients. Recently, with the onrush of social media, compliance has had to broaden its boundaries to address potential problems inherent in this medium.
Social Media is Basically Unavoidable
Social media, including Linkedin, Facebook, and Twitter, dominate the lives of most Americans today. In fact, 66% of all Americans use social media regularly. 90% of all small businesses use social media and 85% of all business have a social media platform integrated into their marketing. They can be tremendous resources for relational and business development.
While compliance has always been one of the chief concerns with any financial planner, the newness of social media leave many wondering what regulations and rules there are regarding their use of these mediums when conducting business. Simply learning social media best practices is a challenge. Add to that compliance and the stress rises just a little bit more.
There are a few horror stories financial planners and those in the financial services industry are aware of where social media compliance is concerned. The existing public cases may have scared more than a few of these honest folks and companies from engaging their clients and marketplace in the social media sphere for fear of accidentally breaking the law with something they otherwise felt would be relevant, but was, in fact, illegal.
90% of all business electronic communications today are transmitted via email, social media, instant messaging, and Bloomberg messages. Amendments to the U.S. Federal Rules of Civil Procedure (FRCP) surrounding electronically stored information (ESI) are becoming more common in legal proceedings. In fact, electronic communication is now included in over 65% of all eDiscovery proceedings. Compliance, therefore, has gone up a notch. Plus, employee personal phones and electronic transmission gadgets that send business-related information, even after hours, may be subject to compliance laws. They simply cannot be avoided.
Still, there are new tools being offered that helps not only the financial planners and their companies relax and stay compliant, but also help the investor, who trusts them with money, remain calm.
Let us first examine what regulations are in place that covers the use of social media to help you, the financial planner, understand what expectations exist for, and govern, your social media communications.
Financial Planners, Social Media, and the Law
FINRA and SEC Compliance
FINRA rule 3010. NYSE rules 342, 440, & 472, and SEC rules 17-a3 and 17a-4 require that all members archive and supervise all electronic messages (i.e. email, instant messages) sent and received. Today, all financial organizations that are FINRA members must comply with Rule 3010 and Sec rule 17a-3 and 17a-4.
The Sarbanes-Oxley Act of 2002 created a set of record retention requirements for all public companies. Email has become part of 70% of all business communication. Of those emails, information regarding business transactions and business decisions and must be retained for compliance. Companies who were non-compliant, or have willfully destroyed records, can face fines and up to 20 years in prison.
The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Modernization Act of 1999, includes provisions to protect all consumers’ personal financial information held by financial institutions. For efficiency, most organizations use email to communicate internally and as a vehicle for the exchange of documents and correspondence between businesses and consumers. Since personal financial information can be transmitted via email and instant message, it is critical to ensure that the security and management complies with GLBA, and requires protecting customers and clients personally identifiable information. Fines and penalties can reach as high as $100,000 for each violation and up to 5 years in prison.
Social Media Recordkeeping
Regulators also are keen to remind members that firms which communicate through social media sites must still adhere to recordkeeping rules.
“Each member shall make and preserve books, accounts, records, memoranda, and correspondence in conformity with all applicable laws, rules, regulations and statements of policy promulgated thereunder and with the Rules of this Association and as prescribed by SEC Rule 17a-3. The record keeping format, medium, and retention period shall comply with Rule 17a-4 under the Securities Exchange Act of 1934.”
Social Media Compliance Considerations
- Social networking sites, such as Facebook, offer no built-in archiving functionality, making it problematic to comply with Regulatory Notice 07-59 that spells out the requirements for review “by a supervisor of employees’ incoming, outgoing and internal electronic communications.”
- Intrinsic archiving functionality offered by fused communications and other real-time communications tools is seldom able to provide a pinpoint breakdown of conversations by persons, key phrases, and timeframes, which are essential for compliance and eDiscovery requirements.
- This is further complicated by the slew of modalities used in conversations – from IM, iPhone, Skyp, to BlackBerry.
Because social media is broad, the following may apply when it comes to compliance and financial planners:
- Advertisements – Any material, other than an independently prepared reprint and institutional sales material, that is published, or used in any electronic or other public media, including any Web site, newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or telephone directories (other than routine listings).
- Correspondence- “Correspondence” consists of any written letter or electronic mail message and any market letter distributed by a member to (1)
- One or more of its existing retail customers; and,
- Fewer than 25 prospective retail customers within any 30-day period.
- Correspondence need not be approved by a registered principal prior to use, unless such correspondence is distributed to 25 or more existing retail customers within any 30-day period and makes any financial or investment recommendation or otherwise promotes a product or service of the member.
- Sales Literature – Any written or electronic communication, other than an advertisement, independently prepared reprint, institutional sales material and correspondence, that is generally distributed or made generally available to customers or the public, including circulars, research reports, performance reports or summaries, form letters, telemarketing scripts, seminar texts, reprints (that are not independently prepared reprints) or excerpts of any other advertisement, sales literature or published article, and press releases concerning a member’s products or services.
Categories of Electronic Communications
- Static Content – Static content is generally accessible to all visitors and usually remains posted until it is removed by the firm or individual who established the account. Examples of static content include profile, background, or wall information. A registered principal of the firm must approve all static content, including Sales Literature and Advertisements, on a page before it is posted or before the page is edited.
- Interactive Electronic Forum – Interactive content (e.g., Correspondence up to 25 customers and Public Appearances) is considered non-static, real-time communications and does not require approval by a registered principal prior to use. However, firms still must supervise these communications. Examples of interactive content include posts on Facebook and Twitter and status updates on LinkedIn.
Social Media Compliance Recommendations
Whether you are a Rock Hill, South Carolina LPL financial advisor, or work for Smith Barney in Chicago, you will be pleased to know that there is software as a solution developed to help track, review, archive, and keep you in compliance where social media, and all other electronic correspondence is concerned. Companies can now create filtration rules to block or restrict words and phrases that violate regulations.
One of these companies, Erado, has created a supervisory and social media compliance software that uses a deep-scan technology to search email, email attachments, Bloomberg Mail, instant messages, and social media to make sure compliance is being followed based on your organizations lexicon and industry standards.
Financial planners should install a central archiving system that enables easy review of posted messages and detailed analysis of electronic conversations, including file downloads both internally and externally, complete with an audit trail of the auditor reviewing the information.
Additionally, there are web and internet social media companies that can manage your company’s social media who are well aware of the compliance issues surrounding your industry. One such company is RevenFlo, who assists financial planners, medical professionals, and law firms remain compliant.
This may seem like a lot of work, but the alternative can be costly and include jail time. Investors should be pleased to know the lengthy demands placed upon financial planners as it is their money the planners are given charge to help grow.
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