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Social Media Webinar for Broker-Dealers and Investment Advisers, Day Pitney Webinar

March 13, 2012

According to a recent Risk Alert sent out by the SEC, social media is "landscape shifting" and its use by the financial services industry is rapidly accelerating. Day Pitney has assembled a team of experienced attorneys to discuss the guidance and other notices recently issued by the SEC, FINRA and state regulators with respect to the use of social media by their regulated entities. Topics included are:

  • Understanding the new guidance for broker-dealers and investment advisers.
  • What is permissible and impermissible use of social media. Designing an effective social media program for your firm.
  • Monitoring and record-keeping requirements for broker-dealers and investment advisers.
  • Use of social media in hiring decisions and disciplinary decisions.
  • Understanding both the employer's and employee's rights regarding social media.

Many of you raised questions during the March 13 webinar, which, due to time limitations, we could not answer. Responses to your questions that we did not get to are below.


When a registered representative of a broker-dealer posts autobiographical information, such as place of employment or job responsibilities on LinkedIn, does this information constitute a business communication?

Probably not, but firms must develop policies and procedures that include training regarding the difference between business and nonbusiness communications to enable appropriate compliance. In certain contexts, such as sending a resume to a potential employer, the communication could be viewed as not relevant to the business of the firm. In other contexts, such as posting a list of products or services offered by the firm, or where, for example, the bio discusses specific products, the communication likely will be viewed as a business communication. Firms should define what is considered a business communication and what is a personal communication. The content is determinative, and there may be some "shades of gray" as to when the line is crossed. That is why it is very important to have proper training of employees as well as a process to make the determination.


May a firm or a registered representative of a broker-dealer sponsor a social media site or use a communication device that includes technology that automatically erases or deletes the content?

No. Technology that automatically erases or deletes the content of an electronic communication would preclude the ability of the firm to retain the communications in compliance with their obligations under SEA Rule 17a-4. Accordingly, firms and associated persons may not sponsor such sites or use such devices. Again, this demonstrates the importance of employee training in order to be in compliance with applicable securities regulations and document retention requirements.


The Advisers Act record-keeping rule requires advisers that keep required records in electronic format to keep them in a manner that allows the records to be arranged and indexed. Are there third-party vendors who can assist advisers in constructing their record-keeping protocols?

Many third-party vendors are available to assist in this area. We will not give any specific names, but our advice would be to interview a number of firms before selecting any one firm to assist you. In fact, the SEC Risk Alert even encourages the use of third-party vendors.


May a hedge fund manager post quarterly letters to investors/clients on Facebook and LinkedIn? If so, are there particular issues the manager should take into consideration in doing so?

Posting quarterly letters to Facebook and LinkedIn is not an uncommon practice as it is an efficient form of communication. Managers using this practice, however, should be cognizant of the record-keeping requirements, the potential that this form of communication could lead to a breach of the prohibition against testimonials and the concerns that the report could be passed on to others in violation of the general solicitation rules. They also should avoid making any recommendations of particular investments. We would recommend that the quarterly report include a detailed disclaimer stating, among other things, that visitors should avoid posting positive reviews and that the information is intended only for the recipient. We also recommend that the manager have a robust policy addressing exactly what is permitted in the quarterly report and what types of commentary would not be permitted and have internal controls in place to ensure that the report can be accessed only by existing investors or qualified pre-existing relationships. Finally, the manager will also need to evaluate when using this form of communication whether the firm is compliant with the record-keeping requirements of Advisers Act Rule 204-2.


Should firms monitor their employees' personal use of social media conducted on the employees' own time and equipment?

Broker-dealers and investment advisers do not have any regulatory obligation to monitor their employees' personal use of social media that does not occur on firm time or firm equipment. Nevertheless, a robust compliance program should consider including random and/or periodic monitoring of employees' publicly available social media postings, even where such postings are created on the employees' own time and equipment. The purpose of such monitoring is to ensure that the employees' use of social media is in compliance with the firm's policies. Provided that such monitoring is limited to publicly available postings and does not intrude on password-protected postings/sites, it should not be considered an invasion of privacy. Such monitoring should be performed only by trained compliance and/or human resources personnel, however, to ensure that any information regarding an employee's protected classification (religion, sexual orientation, disability, etc.) is not improperly disclosed or used in any employment-related decisions.


Who owns social media accounts that are used by employees to develop and/or promote business for the firm?

This is an emerging legal issue that currently is being litigated in several different courts and in a variety of factual settings. In general terms, social media accounts are owned by the social media provider (Facebook, LinkedIn, Twitter, etc.) and are subject to the terms of use established by the provider. The question of "ownership" typically arises when an employee separates from his or her current firm, joins a new firm, and seeks to transfer to that new firm his or her social media accounts and concomitant friends/connections/followers. Litigation in these matters is very fact-specific, and courts tend to focus on such issues as control over passwords; investment of time, money and resources; and the reasonable expectations of the parties. Accordingly, we recommend that firms specifically address the "ownership" issue in their written social media policies and in their written agreements with employees, including but not limited to their confidentiality, noncompetition and/or work product agreements. Such policies and agreements should clearly delineate employees' rights and obligations with respect to social media accounts when they separate from the firm.


Do the regulations require training? Or is it just suggested?

Broker-dealers participating in social media are required to conduct training. FINRA Regulatory Notice 10-06 specifically states, "Firms must adopt policies and procedures reasonably designed to ensure that their associated persons who participate in 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."


Are broker-dealers using social media?

Absolutely, and the numbers are expanding rapidly. Several firms are currently conducting pilot programs and rolling out social media to a growing number of their representatives as they become comfortable with the use of this media and technology solutions expand. The recent guidance from FINRA and now the SEC has given both broker-dealers and investment advisers an appropriate foundation on which to build social media programs.

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