(This is a guest post from Stephen Selby, Director of Regulatory Services at LIMRA.)

As social media users in financial services have discovered over the past couple of years, it’s tough to build a business in a swamp. It makes me think of the King of Swamp Castle from Monty Python and the Holy Grail.

Listen, lad. I’ve built this kingdom up from nothing. When I started here, all there was was swamp. All the kings said I was daft to build a castle in a swamp, but I built it all the same, just to show ‘em. It sank into the swamp. So, I built a second one. That sank into the swamp. So I built a third one. That burned down, fell over, then sank into the swamp. But the fourth one stayed up. An’ that’s what your gonna get, lad—the strongest castle in these islands.

Social media regulation has been a little like Swamp Castle. FINRA released Regulatory Notice 10-06, and built a foundational concept for all of us to follow—all the old rules apply. But the financial services industry as a whole did not believe that foundation was solid enough. We let the first castle sink into the swamp.

Then FINRA released Regulatory Notice 11-39. The financial services industry again said that foundation was not strong enough, so we again let social media fall into the swamp. Foreign regulators like the FSA in Great Britain and the IIROC in Canada published social media guidance in their own countries. The National Association of Insurance Commissioners issued its own white paper on social media. The messages from the FSA, IIROC, and NAIC all tracked well with FINRA’s core message—all the old rules apply. But the financial services industry was not happy with that foundation yet and, even with all of the positives, watched social media again fall into the swamp.

January 2012: The Fourth Castle of Social Media Regulation

Now we have both the SEC and the Commonwealth of Massachusetts issuing guidance for Registered Investment Advisors. To paraphrase the King of Swamp Castle—I am here to tell you what you’ve gotten—the strongest castle in these islands! We have seen securities regulators, insurance regulators, and now RIA regulators all say the same things: Yes, social media is an exciting new form of communication. Yes, we will apply existing rules to this new technology. It should be clear that we are no longer standing in a swamp, but on the strong foundation of a consistent message.

Let’s see how that consistent message applies to RIAs in the Commonwealth of Massachusetts. I will present these points in a different order than communicated by the Massachusetts Securities Division their memo of January 18, 2012. This order should help you structure your approach to social media for RIAs:

• Social Media is subject to supervision. Have a plan. Document it. Test the plan at least annually.
• Training. No policy or procedure is very good unless people know what it is. Therefore training is a really good idea.
• The firm is responsible for all business content. It’s social media time. Do you know what your investment advisor representatives (IARs) are saying?
• Social media is subject to record-keeping requirements. You will need a method of capturing and retaining social media content in a manner consistent with SEC retention rules. (For more, see 950 CMR 12.205(7)(a) and 17 CFR 275.204-2.)
• Frequent supervision is better. Massachusetts states on page 6 of their document “A review done daily would be considered a reasonable supervision of the adviser’s social media site.” Less frequent review can be acceptable—if you have low traffic volumes.
• Social media is usually advertising under RIA rules. Go back to the basics and apply current advertising content and supervision standards for RIAs to social media. Performance reporting via social media is subject to the same content and time standards as any other kind of media. Cherry picking past performance is not permitted. Recommendations are not permitted.
• Adoption and Entanglement applied across regulators. RIAs are responsible for content which they post, Tweet, re-Tweet, or like, or to which they link. RIAs are also responsible for content which is posted on behalf of their representatives by business partners or anyone else who has an interest in the success of the IAR. Selective removal of some content results in the “adoption” of the remaining content.
• “Liking” can be Problematic. To completely understand what Massachusetts is saying about the “Like” button, I encourage you to read SEC Regulation FD and the recent SEC risk alert. The key take-away is that your firm is responsible for any content which is “Liked” by the firm or an IAR. Make sure it’s good content.
• Read the SEC guidance. Massachusetts makes reference to recent SEC guidance on social media usage.

More Best Practices for Social Media Compliance

The Massachusetts document “The Use of Social Media by Investment Advisers” is not intended to tell the whole story. Here are a few ideas you need to consider beyond the recent guidance provided by the Commonwealth.

• Put clear license and registration disclosures in social media profiles. This will help insulate the firm against the appearance of soliciting where the firm is not registered.
• Update the firm’s Code of Ethics. Not all states require a code of ethics, but communicating a standard and then training your people to that standard is always a good idea.
• Face-to-face supervision is a best practice. Take time to review the computers and mobile devices of IARs when visiting satellite offices.
• Understand what is being said about you by solicitors and other business partners. You may need to review agreements to specifically address the use of social media.
• Get help, but take responsibility. Social media use and supervision is ultimately up to you, but Socialware and LIMRA can help get you going.

In closing, think of the King of Swamp castle. “All the other kings” may say you are daft for using social media when there are so many questions, from ROI to compliance. Prove them wrong. Now that regulators for the securities, insurance, and investment advisory business have spoken, you have a firm compliance foundation on which to build your social media practice.

When so many regulators are saying the same thing—maybe you really do have the opportunity to build the strongest castle in these islands.

Image source.

When you hear API, proxy, or hybrid used, it will typically be centered on the topic of social media archiving. And when it comes to compliance, there are some fundamental facts we know to be true:

• Social is a form of electronic communication and thus requires regulatory compliance.
• Archiving business communication on these platforms is a requirement.
• Archiving some of the communication on social networks is not enough.
• Having an effective system in place to detect misconduct is a requirement (MetLife was fined for this last year – they had a policy for email archiving, but the system of management wasn’t effective?)

Just because this is a new medium, it doesn’t mean that regulators will settle for half-measures or incomplete policies/solutions. Firms have a real challenge to not only address the core compliance risks but also figure out how to make social work for the business. And while you are evolving your strategy, be sure to keep an eye on the regulators. FINRA, for example, is issuing additional guidance in September as an extension to Notice 10-06. And in the midst of all of this, social networks are changing daily requiring a constant focus on how those changes impact policies and procedures.

While the conversation typically starts with compliance, it can’t end there. The other side of the coin is business success. You wouldn’t give the keys to a brand new car to someone who doesn’t know how to drive. Social media in financial services is no different. The guardrails of compliance are critical, but those that are getting access must also have the tools and education to deliver results for the business. If they don’t, why take the chance of giving them the keys to the car?

You might be saying, “Yes, I agree, but we are just going to start with compliance.” I can’t fault that approach. The time this becomes dangerous is when the organization focuses on the short-term deployment vs. the long term strategic needs of the business. It is a little like getting in a car to drive cross-country but deciding to leave your GPS at home. Social adoption is a journey, not an event. The road you set off on initially will determine if that journey ends in success or failure.

This puts a premium on having all of the information and education you can before making a decision. Here are some resources to help get you started:

• Social Media Adoption Life Cycle Webinar
• Morgan Stanley Smith Barney Social Media Strategy (video)
• Social Business Activity Cycle

In addition, here are a few questions you should ask of your team or your technology partners before starting your social media journey:

• Can we capture all of the content being created on social sites for business purposes?
• Can we limit access to features on the social networking sites without removing end users from the social networks themselves?
• Do we need to rely on end users to register their own accounts?
• How do we manage personal vs. professional content on these sites?
• Do you have a strategy for how you will ensure end user success (not just access)?
• Do you have a proven mechanism to associate social activity with business results?

These are just a few of the key questions you will want to dive into. After 3 years and 100+ customers, we can share many other questions that your firm will want to consider.

The agenda sparked a lot of questions and involvement from the audience including topics such as the empowered consumer and the regulatory environment especially for financial services firms. When Chad Bockius, CEO of Socialware, was asked whether there was truly a high cost of not participating in social media, Chad explained that the train had already left the station.  Firms need to take advantage of the opportunities to build valued customer relationships using social media.  Since this is constantly evolving landscape, there is no perfect time or plan.  If firms wait six months to put the “perfect” plan in place, that plan will no longer address all of the changes that will take place from now until that time.

Addressing practical implications of setting a social policy, Steve Selby of LIMRA explained that the difference between a good and bad social policy is finding the right balance vs. operating at either end of the spectrum of complete prohibition or wide open access.  Steve went on to address audience questions about FINRA regulatory notice 10-06, specifically static vs. interactive content, and guidance from other regulators like the SEC.  Steve explained that we shouldn’t look for  a “sea stage” from an expected FINRA clarification on social media later in 2011.

Edgar Rodriguez of Distribion, Bockius, and Selby all discussed the connection between the relationship dynamics of social networking and the need for technology to assist in the large volume of interactions, and Edgar expanded on the ability to measure the effectiveness of these interactions and provided helpful suggestions for getting the most of the social interactions.  To learn more about the webinar, you can follow the conversation on twitter #socialmediawebinar and view the webinar.

At our recent customer user group meeting, we were impressed by how open and frank our customers were with us, but more importantly with each other.  With a common goal in mind of developing a community that allows sharing of best practices and pitfalls, we spent a day working through a number of challenges and opportunities.

One of the hottest topics that everyone wanted to discuss was static vs. interactive.  When all was said and done, we agreed on two things.  (1) Content (i.e. what is posted) is king regardless of how/where it is posted.  Trying to label specific features of a social network, as static or interactive is a fool’s mission.  And (2) intent is everything – using the term “extemporaneous” to focus your compliance guidance was well accepted by all.

This led us directly into a conversation tied to pre-review and post-review.  Because of the conclusion on static content, it was agreed that pre-review of content is a critical aspect of a compliance solution and without it you cannot truly be compliant.  However, this does not relieve the compliance obligation, which demands that all information available must be captured whether, performed on network or off network (home computers).  It was very reassuring to all attendees when hearing peers confirm understanding of the regulations and ensure they are using the same solution to meet those regulatory requirements.

Part of our conversation focused around the constant changes occurring daily with the social networks.  Everyone was relieved to hear Socialware’s approach to addressing these changes through our agile product management and development strategy.  This was reaffirmed when Facebook announced a new video chat feature through a partnership with Skype. On that same day, we released a blocking filter should you choose to block this functionality for your users.

Personally, it was a very enjoyable day watching so many of our customers across numerous companies interact with each other.  We all walked out in the afternoon smarter and more educated for the time spent.  I’m looking forward to the next one already.

Here are some of the key findings on advisers use of social media:

• 44% of investment advisers use some form of social media and this number is trending up for next year.
• 41% of advisers age 42-51 and 31% of advisers 52-61 use at least one form of social media. This group represents the largest use across the survey population.
• LinkedIn is the most popular social network used at 41%, Facebook is second at 14% and Twitter is third at 8%

When it comes to social media compliance, firms and their advisers are clearly putting themselves at risk for fines, suspension and possible lawsuits. Take a look at these key findings from the survey:

• 69% of firms using social media stated that they have no written record retention policies for social media content.
• 57% of firms using social media stated that they do not retain all content posted on social media websites.
• 68% of firms using social media stated that they don’t have written policies and procedures governing the use of social media by employees.
• 52% of firms using social media stated that the firm does not monitor or review social media content produced by its employees for business-related purposes.

In the words of the Securities Division, “the Survey suggest that investment advisers using social media sites for business communication may not have implemented sufficient recordkeeping systems and/or supervisory and compliance procedures.” This is clearly an understatement of the situation they discovered. Firms should consider this an early warning to the increased level of scrutiny coming down at the state level.

These results come on the heals of FINRA’s latest announcement that they are going to offer additional guidance on social media use by Registered Reps. This Notice, an extension to what was provided in Notice 10-06, is aimed at clarifying key questions arising from the industry.

As we’ve said before, the social media train has left the station. Advisers are going to use these platforms to grow their business (regardless of corporate policy) and the clock is ticking for firms to embrace this movement and ensure compliance. FINRA has already started their examinations on social media and you can expect states like Massachusetts to follow suit very quickly.

We recently asked top firms in the industry to share the most pressing compliance concerns within their organizations or from colleagues across financial services companies.  The responses shared both the challenges and opportunities that social networks present for business today.  

There was overwhelming feedback that there is still a lot of room for clarity and ensuring that restrictions are consistent with the nature of the social medium.  Some feel that the rules are out of date compared to the ever changing technology and capabilities of the social networks.

Interestingly, social media compliance concerns can vary by department. For example, compliance staff is concerned about effective supervision of business communications. Marketing wants to know which messages are most used, which have the most feedback, and which have generated the most interest. Corporate Communication is interested in protecting the corporate image. Human Resources is interested in employee usage of social media including what they are saying and how much of corporate time are they using to say it.

With all of these questions in the industry, how should that need for clarity be resolved?

Working with more than 100 firms for more than two years on these challenges, we are well aware of these concerns but also the growing examples of firms that are successfully using social business techniques and practices to grow their business.  In order to help bridge the industry and regulation divide, we recently hosted, with LIMRA,  the Regulator Roundtable on Social Media in Washington, D.C. Joined by attendees from seven regulatory agencies and four industry associations, we had a lively conversation about the unique dynamic for social media in the financial services market.

At the roundtable, we shared the concerns that came directly from industry firms.  We discussed how those concerns mapped to the objectives of the regulators.  We covered specific topics like privacy, security, policy and supervision in order to find that middle ground of effective but also compliant social media usage.  The roundtable discussion was well received by all, and we plan to have an ongoing dialog on the topic.

Are you looking for answers for how to ensure compliant and successful social business programs for your organization?  Contact us directly to learn more about how your firm can respond to the compliance challenges in order to realize the business opportunities in social.

American Century Investments surveyed 303 advisors, brokers, and RIAs online at the end of 2010, then compared results to a similar survey a year earlier. This year’s study found that 86% of the respondents have a business or personal social media profile, up 13 percentage points from 73% in Q1 2010.

The lessening concerns about compliance concerns seem to lead the way in the dramatic increase in social media adoption, and more and more firms are successfully deploying solutions to deal with these issues throughout the business. What’s even more interesting? While firms’ concerns decrease, regulatory scrutiny is going up — FINRA put social media on the examination priority list for 2011, the SEC sent out a Sweeps letter and IIROC recently released their social media guidelines. All these trends indicate that social media is obviously a hot topic and beneficial to business – and that IR departments not yet using social media risk being left behind.

Promotions not main goals for social…

Almost 60% of the advisors currently using social media for business mainly monitor industry or market news, research clients or prospects, or reading expert commentary. Next on the list of priorities is sharing news with clients.

…but benefits continue to emerge.

Advisors are generally bullish on social media, with approximately 45% of respondents feeling generally positive about the overall value of social media as a potential tool to grow their business. And while few study participants said they believe social media has “high business value,” those who ranked it highly increased this year over last: 13% in 2011 versus just 8% in 2010.

Also, more financial professionals feel that social media is an “emerging trend with significant future potential” — 56% of respondents agreed with this assessment this year, versus 44% last year.

This survey, which we also covered last year, continues to indicate the importance and growth of social media among financial professionals. Firms that remain on the fence about social media are definitely being left behind.

• What does the Sweeps letter mean for the industry?
• What should I do now?
• What resources are available to help me get compliant, quickly?

Before we dive in, if you haven’t read Part 1 please check it out for some background on this discussion.

So what does this mean for the industry? First and foremost it is a wake up call.  Remember social media is no different than any other form of electronic communication. Content that is considered an advertisement is an advertisement, regardless of the medium (website, forum, social network, etc).  In a nutshell everything has changed but nothing has either. The communication mediums have changed drastically but all the same rules apply. The FSA made this clear, IIROC made this clear and so did FINRA.

In a recent Wall Street Journal article they shared that “an SEC official said that misuse of social-networking sites is an issue that is cropping up during SEC examinations and enforcement actions. Problems include advisers who use false information in their LinkedIn profiles or overstate their experience, said John Walsh, associate director and chief counsel of the SEC’s office of compliance inspections and examinations.”

It is clear that social media has caught the attention of the SEC (and every other regulator for that matter).  Following this sweep and increased scrutiny I fully expect to see fines and perhaps a summary of lessons learned from the SEC. I doubt there will be any new rulemaking, at least not in the short term. FINRA, IIROC and the FSA have all found their existing rules to be sufficient, although clarifying guidance has been issued.

What should you do now? Here are five tips you should consider to make sure you and your firm are protected:

1. Take action immediately. Start with an audit of your firm’s policies on social media use. If you don’t have one, put a policy in place immediately.
2. Review the regulator’s guidance on social media, like FINRA 10-06. Use this as a best practice template on how to proceed.
3. Audit your firm’s use of social media. See how it is being used, the value it is driving and how big of a compliance problem you have today.
4. Put in place the necessary tools to automate the compliance process to ensure you and your firm are protected.
5. Train your advisers on the compliance issues and best practices associated with sites like LinkedIn, Facebook and Twitter.

To help get you started I’ve compiled a list of resources that might help:

Whitepapers / Guides

• Companion Guide to FINRA 10-06
• Guide to Twitter Social Networking Compliance
• Guide to LinkedIn Social Networking Compliance
• Guide to Facebook Social Networking Compliance

Webinars

• Social Media Adoption Lifecycle (a series of 6 detailed webinars)

Community

• SocialTurns.com

We will keep following the moves of the regulators in this space. Check back for additional information soon and let us know how your efforts to adopt social are going.

There has been a lot of speculation about what it all means for the industry. Before offering a point of view on that question let’s review what it said exactly:

• SEC: “All documents concerning any communications made by or received by [Adviser] on any social media site”
  In other words, you need to be archiving your social media activity. You should look for an automated approach to capturing all the required content and recognize that unless the solution can capture 100% of the data created on these sites, it isn’t a solution.

• SEC: “All documents concerning [Adviser]’s policies and procedures related to the use of social media web sites by [Adviser]”
  Just like email and IM, this form of electronic communication must be governed by a set of policies and procedures. Your policy should outline at a high level the corporate approach and guidelines to social media.  Your procedures should define the who, the what, the where, the when and the how of the policy itself.

• SEC: “All documents concerning [Adviser]’s policies and procedures concerning a third party’s use of any social media website maintained by [Adviser]”
  The question of 3^rd party comments really hits on the topics of entanglement and suitability. A comment on a social media site alone does not equal an endorsement, but there are situations that you must consider and construct your policy and procedures with those in mind. For example, how will you treat the “liking” of a comment or the “favoriting” of a tweet? If it occurs on the wrong comment you could create an issue for yourself. If it occurs on a benign statement the regulators will not take issue.

• SEC: “All documents concerning [Adviser]’s policies and procedures related to the use of social media websites by [Adviser]’s personnel for personal, non-business related matters”
  The topic of personal vs. professional is a complicated one. First, you are not allowed to have separate identities on social media sites, it is against the terms of service for LinkedIn and Facebook. Second, it is often the personal relationships that ultimately translate to business. There are multiple ways to account for this issue. Some are policy based and some are driven by technology. Check back for more on this topic as it really warrants an entire post.

• SEC: “All documents concerning [Adviser]’s personnel training and education related to the use of social media websites by [Adviser], whether for personal, non-business related, or business related matters”
  One consistent thread from all of the regulators in on the topic of training. If you are going to open up access to social media you must train on the policies and procedures. Additionally, it is a tremendously valuable investment to help individuals understand how to apply these new platforms to accomplish key business goals. On that topic, LIMRA and Socialware have recently released a whole series of training to specifically address everything from the regulatory issues to the business best practices.

• SEC: “All documents concerning [Adviser]’s record retention policies and procedures concerning the involvement with or usage of, whether for personal, non-business related, or business-related matters, any social media website maintained by [Adviser]”
  Not only is it critical to archive this electronic communication, it is also your responsibility to document what is required to be archived.  This documentation should account for the individual Advisers as well as anyone that supports them in their social media efforts.

For those of you that haven’t seen the Sweeps letter, I hope this detail helps. In a follow-up post I will address the following:

• What does the Sweeps letter mean for the industry?
• What should I do now?
• What resources are available to help me get compliant, quickly?

A survey of almost 3,300 executives from various industries reveals significant increases in the percentage of companies using social networking (40 percent) and blogs (38 percent); and the number of employees using Web 2.0 technologies continues to increase — respondents at nearly half of the companies that use social networking say, for example, that at least 51 percent of their employees use it.

Among respondents at companies using Web 2.0, a large majority continue to report that they are receiving measurable business benefits—with nearly nine out of ten reporting at least one. These benefits ranged from more effective marketing to faster access to knowledge.

Three levels of social networking integration

McKinsey found three levels of social networking business integration. Internally networked organizations tightly integrate Web 2.0 into their daily work flows, sharing information easily and among all business silos, easing collaboration.

Externally networked organizations spread interactions beyond corporate borders to interact with customers and business partners. While collaboration internally isn’t usually as smooth, these businesses gain advantages from outside sources, and usually have larger percentages of their customers, partners, and employees using Web 2.0.

Three percent of organizations surveyed were fully networked enterprises, deriving very high levels of benefits from Web 2.0’s widespread use, involving employees, customers, and business partners, according to the survey. These firms are much further along than others, seeing the benefits of internal and external collaboration, breaking down organizational barriers that impede information flows.

By forging close relationships with customers, fully networked and externally networked organizations see the largest market share gains. McKinsey finds this correlates with these companies by effective marketing through social networking and involving customers in customer support and product-development efforts. Companies that are internally networked also see some market share gains.

Fully networked organizations also see higher operating margins. In these organizations, Web technologies let frontline staff make local decisions that lead to greater agility.

Most surprising? Increased market leadership correlated most with internally networked organizations, but externally networked organizations correlated negatively with market leadership. However, McKinsey does not believe that external uses of Web 2.0 decrease market leadership; it’s more likely that market leaders use Web 2.0 to strengthen internal collaboration, seeking to enhance the organizational resiliency required to maintain their leadership positions. Market challengers, by contrast, may be more focused on external uses of Web 2.0 to win customers from industry leaders.

SOURCE: “The rise of the networked enterprise: Web 2.0 finds its payday,” McKinsey, December 2010.

Overall, McKinsey finds that 27 percent of the companies have both market share gains against their competitors and higher profit margins. This kind of performance clearly makes these companies profit consolidators in their industries, with earnings growing faster than the rest. And highly networked enterprises are 50 percent more likely to fall in this high-performance group than other organizations were. This finding suggests that the fully networked enterprise could become the benchmark for more vigorous competition in many industries.

Direct impact for financial advisors

A report from Aite Group, based on a survey of 402 advisors, showed that, of advisors who use social media professionally, 36 percent say it has helped them increase awareness of their practice and differentiate them from the competition. While many firms have policies that decrease the use of social media, advisors who use Web 2.0 believe it benefits them.

SOURCE: “Financial Advisors’ Use of Social Media,” Aite Group, December 20, 2010.

“Beyond the benefits that they have already realized,” says Ron Shevlin, senior analyst with Aite Group and author of this report, “advisors using social media feel that the tools can help support a range of business objectives, from building customer relationships to supporting customer acquisition and employee recruitment efforts.”