With the increased use of social media by financial services industry participants, more activity and scrutiny can be expected from financial regulators. This is not to mention the litigation from investors that could arise out of, for example, the misinterpreted or well-meaning post from an advisor that simply did not translate to “less than 140 characters.” It appears that there is a trend (amongst at least the larger financial institutions) that a united and pre-approved voice is best for now.
Social Media has become a critical business tool for financial advisors. A recent study of the use of social media in the financial services industry concluded that 7 in 10 financial advisors are already using social networks for business purposes as illustrated by the following excerpt:
With a business that is fueled primarily by networking, advisors are increasingly integrating social media as a core element of their marketing efforts. This comes as no surprise, given the adoption rates of their prospective clients: According to Forrester Research, two-thirds of U.S. Online adults with an investment account now have social network profiles.
Indeed, after concluding a year long trial involving 600 employees, financial giant Morgan Stanley recently announced that it plans to give its roughly 17,000 financial advisors at Morgan Stanley Smith Barney partial access to Twitter and LinkedIn over the next several months. Morgan Stanley’s big roll out has been widely criticized for its somewhat conservative approach which calls for its financial advisors to draw from a prewritten library of Twitter messages, e.g., “Morgan Stanley Advisors Take To Twitter To Do Nothing Very Interesting.” The company apparently decided to shelve an experiment that allowed a handful of investment advisors to compose their own Twitter messages. Its investment advisors also must submit all LinkedIn postings for approval.
This criticism may be easy to dish out for those whose Twitter feeds are not regulated by several state, federal and even international regulators. Financial services industry participants — particularly large institutions such as Goldman Sachs (which sent its first “Tweet” at the end of May of this year) — have to balance the spontaneity of social media with the competing concerns of the protection of its investing public and the potential costs associated with disregarding those concerns in a regulatory climate that has latched on to social media as a paramount concern to the investing public. It was recently reported by Reuters that FINRA, the Financial Industry Regulatory Authority, asked questions about social media in more than 1,000 brokerage examinations since mid-2010. Not having a social media policy in place — even one prohibiting the use of social media – was the most common violation of industry regulations. See prior blog post here concerning prior industry guidance on these policies. According to Amy Sochard, FINRA’s director of advertising regulation, the second most common industry violation was failing to enforce those existing social media policies, whether through record keeping or the storage of electronic communications. In this regard, Reuters recently reported that at least one registered investment advisor (disclosing on the condition of anonymity) was issued an exam deficiency letter by a state securities regulator which cited deficiencies relating to the failure to create and outline proper procedures for social media use, its failure to train its employees in those procedures, and the failure to check up on the activities of its employees on LinkedIn and Facebook, even though the company had hired an outside company to save messages employees sent through the sites.
Pre-approved social media content also alleviates the need for dedication of additional compliance resources — a cost-center that is typically stretched too thin. Similarly, outsourcing review and approval of the content of social media (as opposed to outsourcing a recordkeeping function), is likely not an option for a prudent entity or advisor, particularly with FINRA’s increased expression of interest concerning outsourcing and vendor selection in the industry as reported in Notice 11-14, which sought comment on proposed FINRA Rule 3190 concerning vendor selection and outsourcing. In any event, the ultimate responsibility for compliance with securities laws and rules rests with the firm.
For services that are supposedly free of charge, the increasing prevalence of social media in the financial services industry is coming at quite a cost to those ultimately responsible for its content. Many things — such as the use of email, advertising and financial information, to name a few — are simply different for those involved in the financial services industry because they face the added burden of a complex web of securities laws, external regulators and their rules, as well as internal compliance codes and legal regulations. Social media, the Johnny-come-lately, is proving to be no less complex of an issue — far from it.