The good news for those considering a move to social is that FINRA clarifies you do not need prior approval for communications posted on social sites as long as they qualify as interactive electronic forums. FINRA tried to introduce the concept of static vs. interactive with Notice 10-06 but unfortunately it created more confusion than clarity in the market. That was the one component introduced in 10-06 that was new, but there were no rules in place to support the actual definitions. The rest of 10-06 was clarification on existing rules. So we are back to where we started. It is all about the content and it’s classification.

You can access the entire SEC submission here, but to save you some time I’ve gone through and called out the parts that are most applicable to social media.

Communication Categories

The current NASD Rule 2210 divides communications into six separate categories:

• Advertisement
• Sales Literature
• Correspondence
• Institutional Sales Material
• Independently Prepared Reprints
• Public Appearance

FINRA is proposing to reduce the categories from six down to three. The new categories would be as follows:

• Institutional communication: includes all communications that fall within the current guidelines.
• Retail communication: includes any written (including electronic) communication that is made available to more than 25 retail investors within any 30-day period.
• Correspondence: includes any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30-day period.

The proposal eliminates the current definitions for advertisement, sales literature, institutional sales material, public appearance and independently prepared reprints. They point out that “communication that currently qualifies as advertisements and sales literature would generally fall under the definition for retail communications.”

As it relates to Retail communication they provide a supervisory exemption for specific categories of this communication type. Two of these categories matter for social media. The first is any retail communication that is posted on an online interactive electronic forum (eg., social networks).  The second is any retail communication that does not make any financial or investment recommendation or otherwise promote a product or service of the member.

FINRA explicitly points out that the clarification around interactive electronic forums “codifies their current interpretation of the rules governing communications with the public on interactive electronic forums.” In other words, Notice 10-06 provided guidance to the industry but did not actually create any new policy. This change will make the interpretation explicit from a rule standpoint. There is no mention of the notion of static vs. interactive, which has caused confusion in the industry since no policy exists to back up those definitions introduced as part of 10-06. The second exemption broadens a current principal such that it would apply to all retail communication. This second exemption is important for social media because so much of what gets shared isn’t financial or investment related.

Both of these are positives for firms looking to embrace social for their reps.

In a nutshell it makes clear that organizations DO NOT need to pre-review content that is posted to social networks like Facebook, LinkedIn and Twitter.

Of course, recordkeeping requirements sill must meet the current standards. In addition to the recordkeeping, firms must supervise this content in the same manner as correspondence (i.e., post-review).

FINRA also reminds readers that rules around predicting performance, implying past performance will recur or making any exaggerated or unwarranted claim, opinion or forecast still apply. In other words your content must be fair and balanced. Something that a California-based broker failed to adhere by and as a result of her tweets was fined and suspended by FINRA.

One of the other interesting additions was the following: “Given the rapid changes to technology used to communicate with customers, FINRA believes it will be useful going forward to have exemptive authority with regard to the principal pre-use approval requirements applicable to retail communication in certain circumstances.” This statement shows an understanding that technology and communication mediums are evolving faster than policy can keep up. In theory this will help FINRA support the industry in a timely fashion without having to wait for formal rule clarifications or modifications (like this one).

3^rd party comments were mentioned but FINRA felt that Notice 10-06 in combination with previous guidance adequately addressed that topic.

The one area not specifically called out is social networking profiles. Going back to 10-06, FINRA calls for this content to be pre-reviewed and classified it as an advertisement. Under the proposed rule change it would now be classified as a retail communication. There is nothing in the proposed changes that would suggest it qualifies for the exemptions outlined above. As a result this content must still be pre-approved before being posted to social networking sites.

Comments on the proposal must be submitted to the SEC on or before August 24, 2011. At this point it is anyone’s guess as to when this will be finalized and approved. Independent of that date, these changes provide some great insight into how FINRA will look at social media communications. I suspect other state and federal regulators will be taking note as well.

In an article from FA Magazine, Joe Price of FINRA discusses reconvening the social media task force to offer additional guidance on top of what has been provided in Notice 10-06. I for one applaud FINRA for continuing the discussion with the industry on this topic. In 12 short months we’ve seen over 100 FINRA-regulated firms adopt social media in a compliant fashion. These experiences have led to many learnings and some additional questions.

Many firms are also realizing that the honeymoon period is over. FINRA announced their examination priorities for 2011 and social media is one of the 20 areas listed. To quote their priorities announcement “In 2011, firms can expect FINRA examiners to review supervisory systems and recordkeeping for electronic communications like social media.” It should be noted that firms need to account for positive supervisory procedures as well as the reverse (test and ensure that reps are adhering to prohibition, if that is the policy)

Along this journey many firms have inquired about state regulators and their stance on social media. To date we have not seen any specific guidance from these regulatory bodies but we have heard anecdotes of state auditors examining social media policies, procedures and systems to support compliance. Without direct guidance it appears this auditors are using FINRA’s guidance as their measuring stick. This isn’t surprising when you look at the information coming from the SEC and IIROC. The guidance they are providing all looks very similar to FINRA’s.

Back to the topic of additional guidance, in the FA Magazine article described above, Joe Price is quoted as saying “People have said to me, ‘You’re not being creative enough. You’re not appreciating the fundamental sea change going on in communication,’” He points out that FINRA can’t modify the rules on its own because record-keeping requirements were established by the SEC, but does mention “We may need to rethink those old rules.”

There is no doubt this is a unique medium. That being said firms that wait to act are only putting themselves at more risk. Just look at what we found in our Advisor Survey last year. 40% of the respondents stated they were knowingly violating corporate policy to take advantage of the business benefits of social networks. By supporting a policy of prohibition you are actually inviting risk, not reducing it.

In addition, and perhaps more important, you are losing out on all the value that can be driven from these sites. Don’t believe me? Check out the recording of our latest webinar on LinkedIn Business Benefits. You’ll hear about real-world use cases and techniques for transforming your practice using LinkedIn. So stay tuned. 2011 is going to be a banner year for social media – for many reasons…

After reading through the Notice here is my take and a few of the most interesting points:

“Whether materials are classified as advertising or sales literature will generally be determined by their content and purpose rather than by the method of communication used”

In other words the communication platform itself doesn’t dictate the regulation but the content & distribution does. This mirrors FINRA’s guidance as well. There was no new regulation issued as part of 10-06 it simply clarified existing regulation in the context of social media sites like Facebook, LinkedIn and Twitter.

“Dealer Members’ policies and procedures should include a process to approve the involvement of particular individuals in such endeavors, and guidance and training to ensure that they are aware of the boundaries between general commentary and advertising or sales literature.”

Social media can create many new opportunities and challenges. As a result Dealer Members’ must train on the ins and outs of these sites and ensure individuals understand the compliance boundaries. FINRA made this same point in 10-06.

“Dealer Members must therefore design systems and programs with compliant record retention and retrieval functionalities for all methods of communication”

This means that all of your content associated with business activity on social networks like Facebook, LinkedIn and Twitter must be archived according to NI 31-103.

From a supervisory standpoint they point out that it is at the discretion of Dealer Members to determine whether to employ pre-use approval, post-use review or post-use sampling. However they go on to say “Static content, such as a profile, background or wall information, usually considered an ‘advertisement’, must be pre-approved pursuant to IIROC Dealer Member Rule 29.7(3).” They further clarify that “an interactive electronic forum such as Facebook and Twitter, on the other hand, includes real time discussions and although it does not require prior approval, must be supervised to ensure compliance with IIROC Dealer Member Rules and securities legislation.”

While they don’t go into as much detail as 10-06 offers, it is pretty clear that they are relying on the same definitions of static vs interactive so the classifications identified through the interpretation of FINRA’s Notice should apply here as well. If you haven’t downloaded the social networking compliance guides that offer this detailed classification you can get them here.

As it relates to third-party communications and research they point out “third party posts may be attributed or considered an endorsement by the [dealer], thereby triggering regulatory and legislative requirements. For example, re-tweeting a client’s post or providing a thumbs-up may be considered an endorsement.”

This interpretation is identical to what we’ve seen on the FINRA side as well. The Guides mentioned above discuss these types of issues and provides recommendations as to whether you should block or allow the site functionality.

It is great to see IIROC providing this additional clarification. Judging from the activity here in the U.S., this Notice should help Canadian firms accelerate their move from prohibition to participation, all in a compliant fashion.

You can access the full report from Cisco but here are a few of the statistics that caught my eye:

• Of the employees that admit breaking IT policies, about 41% say it’s because they need the restricted program and application to get the job done — they’re simply trying to be more productive and efficient.
• 20% of employees worldwide said they break IT policy because they believe their company or IT team will not enforce it.
• 41% said they are restricted from using Facebook at their job and 35 percent are restricted from using Twitter at work or with work devices.
• 66% of employees believe they should be able to connect freely with any device — personal or company-issued — and access the applications and information that they need around the clock. Policy or no policy, many employees will simply do it, raising the question about how effective a policy is and how IT can update, enforce and ensure better compliance.

In the world of regulated industries policy enforcement is critical. You can’t simply assume that employees will remember all the things they should and should not do. Automating that policy (for both access and data capture) are steps organizations can take to start opening up access to the social web.

Companies also need to start planning for multi-device use. While you can’t always enforce usage policy outside of work you can plan for ways to manage the data that is being created. This is especially true for regulated industries where data retention and supervision is required.

This got me thinking about firms that are trying to manually monitor LinkedIn. Not only is it inefficient but it’s also ineffective. For example, say that you are going to rely on LinkedIn’s search to find reps from your company. The site offers a fast way to browse profiles, but they limit you to 300 results. This is a huge issue.

The only other option is to manually search for reps by name. Talk about a waste of time. And what will FINRA think of this approach to supervision? In the recent MetLife ruling FINRA fined the insurer $1.2mm because their email supervision approach was “hardly an effective means to detect misconduct.”

We recently spoke to a registered rep of a top 10 wealth management firm. Their policy allows reps to have LinkedIn profiles but they must be pre-approved (more on that later). While the content of the profile is approved by the Ad Review Department, there are no automated mechanisms to detect misconduct or better yet, ways to prevent it in the first place.

Taking advantage of LinkedIn’s Advanced Search I was able to find reps of this firm that had recommendations, certifications, personal activities and group associations – all violations of the firm policy and in some cases violations of SEC/FINRA regulations. The reality of social networking compliance is that the policies and procedures must be automated. The volume of content and activity is simply too high and the pace of change is too great.

So what exactly do firms need to be thinking about when it comes to LinkedIn compliance? Early this year FINRA published 10-06 as we all know. Even though the notice has been out for almost a year there still seems to be confusion. Let me try to clear up some of the confusion.

1. There are no new rules, just interpretation of the existing ones.
I took this point for granted early on. But as I talked to more and more companies I got the sense that organizations felt they had to deal with new FINRA rules. The reality is that 10-06 is simply an interpretation of their existing rules. Here is a snippet from the Notice that makes this point.

FINRA is issuing this Notice to guide firms on applying the communications rules to social media sites, such as blogs and social networking sites…At the same time, FINRA is seeking to interpret its rules in a flexible manner to allow firms to communicate with clients and investors using this new technology.

2. LinkedIn IS a social network
Another point I’ve heard from the industry is that some compliance departments don’t believe LinkedIn is a social network and as a result 10-06 doesn’t apply. FINRA actually calls out LinkedIn specifically in their notice and the same rules apply here as they would for Facebook, Twitter or other forms of electronic communication.

“Social networking sites, such as Facebook, Twitter and LinkedIn, typically include both static content and interactive functions.”

3. LinkedIn content must be archived and supervised
Yes and Yes. FINRA differentiates between static and interactive content on the social networks. They point out that static content is information like a LinkedIn profile and as with other web-based communications a registered principal of the Firm must approve all static content on a page of a social networking site before it is posted. This can create an issue for firms that don’t have the ability to manage access to the edit features of these profiles. Otherwise you are trusting a rep won’t violate policy, and testing against your policy would be highly manual and error prone.

In addition, FINRA makes it clear that every firm must ensure that it can retain records of social media communications as required by Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 and NASD Rule 3110. For firms that allow access to LinkedIn without automated archiving and supervision this creates a massive risk. Here is a quick example of one risk that most firms overlook.

The main driver of value on LinkedIn is your network. You build that network by inviting people you’ve worked with, clients, prospects, recruits, etc. As you can see from the form above you create a short note to the contact so they remember you and understand why you are asking to connect. For firms that allow access without an automated solution they are going to miss every connection note (won’t be archived or supervised) and be in direct violation of FINRA/SEC.

If you are looking for more information on understanding FINRA 10-06 or LinkedIn specifically you can download the following guides:

The Companion Guide to FINRA/SEC Social Networking Compliance

A Guide to LinkedIn Social Networking Compliance

Powered by Socialware’s Compass solution, the new integrated offering combines our unique abilities around social media archiving, pre-review, feature-level policy automation and social media analytics with AdvsiorMail so firms can take advantage of the opportunity social media presents, in a compliant fashion.

As we’ve discussed before, the compliance questions around social media continue to grow. Should you open access? If you do, how do you supervise the content? How can you ensure reps and employees follow your policy? The list goes on and on. The fact is, every social media site poses its own unique challenges and considerations. To help firms get clarity in this area, we’ve published numerous guides and webinars which can all be accessed through Socialware Insights.

By combining Compass, AdvisorMail and our ongoing commitment to provide expertise from both a compliance and best practice standpoint, firms can now adopt social media confidently, quickly and on their terms – critical to managing the compliance issues that face this industry.

To learn more about this integrated offering please contact your LiveOffice representative.

Why? LinkedIn and Facebook, the preferred networks, allow them to be more visible, let people know what they do, have a platform for questions and answers, reconnect with old friends (who, in turn, provide introductions and referrals).

Like the rest of the marketing world, financial pros understand that social networking will be an important business development tool (even if they’re not using it already), and all of those surveyed said it was worth their time to be engaged in such networks.

This is no surprise, but it poses a challenge: some are using social networks with or without guidelines from the “home office.” And many who use LinkedIn or Facebook would love to go further – post presentations on Slideshare, blog, and more. Users at national financial services firms are more likely to be limited by strict corporate guidelines – worst of all, many users admit they don’t actually know what their companies allow.

“Compliance guidance is mixed,” says LederMark. “Whether it’s a no-use policy, unclear parameters or daunting approval processes, there is frustration among those who want to utilize social media for their practice and do it by the book. This is where we hope these survey results can shed some light on not just the status of social media use, but the challenges and impediments remain.”

And firms have reason to worry about compliance. According to this grid showing how reps currently use social media, firms will open themselves up to undo risk unless they are retaining records, pre-reviewing the content, and more.

There’s no doubt: Social networks are here to stay, and it’s time to create guidelines and processes that make it easy on reps – and firms – to remain in compliance, without a lot of heavy lifting.

To help jumpstart your initiatives I’d recommend viewing some of our recorded webinars. Today’s session with Debbi Corej from Prudential was especially helpful, it is jam packed with answers to your top questions, real world recommendations and tips for how to adopt social networks in a compliant fashion.

“This session addresses supervision of social media, including third-party networks, firm sponsored communities and blogs. Industry panelists discuss FINRA Regulatory Notice 10-06, what their firms do and do not allow, how they monitor activity and the types of applications they use.”

One of the panelists was Debbi Corej, a VP of Compliance at Prudential. Debbi has been a trailblazer in this space helping her firm to understand the risks and opportunities with social networks. She’s shared her insight most recently at the FINRA conference and has graciously agreed to participate in our upcoming webinar, FINRA Conference Recap on Social Media, Tuesday June 8^th at 1 PM CST.

If you haven’t registered yet please do so today. If you have a conflict we will record the session so you can view it at a later date or share it with colleagues.

Some of the topics we will cover on the webinar will be:

• Why you should enable social networking at your firm
• How social networking has surpassed email
• Clarifications from FINRA Notice 10-06
• What’s unique about social networking compliance
• Separating personal from professional on social networks
• The risks of using LinkedIn as a “business card”
• How you get started
• How you set your policy
• How you can manage the risk
• The Do’s and Don’ts, practical best practices

Most importantly we are devoting a large portion of the webcast for audience Q&A. Please register early and share any questions you have. We hope to see you Tuesday.

Some of the topics discussed were:

- Implications and questions of FINRA Notice 10-06 for financial advisors.

- Whether or not financial advisors will get value out of social networks.

- How you should treat personal vs. professional data while on these social networks (check back soon for a detailed blog post on this topic).

- Whether this new channel will overload the compliance department.

- Why firms and advisors are having a hard time understanding the compliance issues.

- Why firms are racing to adopt social media.

- Whether or not these are just tools for the younger generation.

- Best practices for advisors to get the most out of their social media investment.

- How long it takes to get a program up and running so advisors can start leveraging these sites.

I hope you enjoy the discussion and I look forward to seeing you at the CFDD conference in October.

• “We aren’t allowed to use social networks but we can use LinkedIn”
• “Our firm allows us to use LinkedIn but the activity isn’t monitored”
• “LinkedIn doesn’t fall under Notice 10-06”
• “We prohibit use, and our employees follow that policy”

For those of you following the social media trends in this sector you will recognize right away the risk caused by the beliefs above. Before going any further let me make a few things clear. LinkedIn is a social network. More importantly, LinkedIn is absolutely governed by Notice 10-06. And last, firms that allow the use of LinkedIn without the appropriate policies and oversight are guaranteed to get fined by FINRA at some point soon.

Just look at a recent study by Ledermark. They found “more than 40% of professionals under 50 said a social media presence has led to doing business. They prefer LinkedIn for business and Facebook for personal use; however, both social networks allow them to be more visible, have a platform for questions and answers, and reconnect with old friends, introductions and referrals — all cited as how social media helped bring in business.”

If you think your reps aren’t using LinkedIn do a quick search to find out.  Just enter your company name and see how many profiles show up.

Now onto the assessment. To complete the assessment simply answer yes or no to each question below. Give yourself one point if you answer NO and zero points if you answer YES. Your level of compliance risk will be described below. Let’s get started:

1. Do you prohibit registered reps from using LinkedIn?
2. Is this practice defined in a social media policy?
3. Have you completed spot audits to ensure they are following the policy?
4. Are you pre-approving their profile content before it is posted?
5. Are you completing spot audits to ensure the content hasn’t changed?
6. Are you preventing reps from displaying recommendations on their profiles?
7. Are you archiving the content posted to and created on LinkedIn?
8. Are you supervising the content posted to LinkedIn after the fact?
9. Are you preventing reps from rating answers provided by other members of LinkedIn?
10. Are you preventing reps from emailing more than 25 connections via LinkedIn Mail?

Now tally up your score and match that to the table below.

Score = 0: Good news, you aren’t at risk but you likely aren’t getting any of the benefit of LinkedIn either because you are in total lockdown.
Score = 1-5: You are probably handling compliance in a highly manual fashion. Not only is this costly but it is also error prone.
Score = 6-10: You are at high risk for a fine from FINRA. Quickly find an automated way to manage site access, content archiving, supervision and discovery.

If you are concerned and need some more information here are a few resources that can help:

• Companion Guide to FINRA/SEC Social Networking Compliance
• Social Networking Compliance Webinar
• Summary blog post from the FINRA webinar discussing Notice 10-06