In recent weeks, there has been some confusion about FINRA’s stance on social media. Between one source and another, it seems as if there’s a general feeling that FINRA is “backing off” from social media. We don’t agree. We’re going to attempt to clarify FINRA’s position, but first, some context.
Since the consolidation of NASD and the regulatory function of NYSE in 2007, the newly established entity, FINRA, has worked towards creating a new, consolidated FINRA Rulebook. The goal is to harmonize and streamline existing rules (from NYSE and NASD), adapt to the changes in the securities industry, and create a set of rules that are flexible enough to be used across different types of firms regulated by FINRA.
As FINRA has clearly stated that social media is just another form of electronic communications and should be treated as such, firms are closely watching FINRA’s progress on the consolidation of rules that impact social media, such as supervision, bookkeeping, and communications.
In July 2011, FINRA filed proposed changes to Communications with the Public rules with the Securities Exchange Commission. Since then, there have been two rounds of comments from the industry with FINRA submitting the final proposal for changes on December 22, 2011, to the SEC. The SEC is accepting comments from the industry until January 18, 2012, and will comment on the proposed rule sometime after that.
The issue that has everyone talking within social media circles begins on page 10 of the December 22nd letter. The current NASD Rule 2210 specifies six types of communications, with different regulatory requirements for each. One category, “Public Appearance,” used for “participation in a seminar, forum (including an electronic forum), radio or television interview” was where FINRA originally classified interactive posts on social media. That meant that firms were responsible for supervising such activities to ensure compliance with content standards and maintain appropriate records but were not required to file these posts with the FINRA Advertising Department. (A sidenote for those of you unfamiliar with the regulatory process: depending on how they are categorized, certain advertising and sales literature materials need to be both pre-approved by a registered principal of a firm and then sent to FINRA for review and approval.)
Under the new rule, however, FINRA Rule 2210 would be streamlined to have only three categories of communications and “Public appearance” would no longer be a separate category under communications. Instead, FINRA has proposed categorizing social media as “Retail Communications,” which has a different set of regulatory requirements. When the industry expressed concern that this would make using social media overly complicated for firms, FINRA specifically excluded posts on online interactive electronic forums from filing requirements.
However, it’s important to note that although social media may not be subject to filing requirements with the proposed rule, firms still need to ensure compliance with content standards and bookkeeping requirements like any other written communications. That means that social media communications need to be captured, supervised, archived, and made available upon request. Filing is not archiving after all, and a number of folks appear to have been confusing the two terms.
Backing off social media? We don’t think so, especially when the SEC issues two alerts and charges a firm with the fraudulent use on LinkedIn in one day. In fact, we think that the regulators will pay close attention to the use of social media in the coming year to demonstrate their commitment to protecting investors.
Are you ready? We’re certainly standing by. In fact, we’re planning on putting on a webinar once FINRA 2210 is finalized, so watch this space for details. And feel free to contact us if you’d like to chat about your specific social media concerns in the meantime.