FINRA Guidelines for Highly-regulated Industries Entering Social Media

FINRA’s Regulatory Notice 10-6 issued earlier this year has cleared up few social media regulatory and ethical concerns faced by investment management firms.

Financial Firms Take to Facebook, Tweeting

After considerable foot-dragging and regulatory confusion, asset management firms are finally exploring and exploiting the world of social media.

Even the most conservative mutual fund firms and annuity issuers are starting to experiment with such sites and services as Facebook, Twitter, YouTube, MySpace, LinkedIn and Blogger.com, according to research by the analysts at Corporate Insight. [Click here to read more.]

Investment firms implored FINRA to create guidelines but Regulatory Notice 10-6 doesn’t quite hit the mark. FINRA’s Social Networking Task Force outlined a framework for compliance but didn’t address details concerning social networking implementation or the nuances of social networks individually. For instance, regulators specifically stated that the rules are meant to be flexible so that firms can use reasoned judgment when applying them but since the guidelines were released earlier this year many firms that thought they were in compliance were instead fined because they exercised the very flexibility FINRA itself encouraged.

Furthermore, the guidance FINRA did provide may be too difficult to implement due to the fast-paced interactive nature of social media. For example, with regard to investor relations, all customer complaints, account changes, and order errors must be reported to FINRA within 15 days of being identified. Keeping up with increased volume from the fast pace of social media may be nearly impossible under existing regulatory guidelines.

Because of significant unresolved regulatory issues, experimentation among most investment management firms dabbling in social media has not been particularly strategic and instead has focused more on monitoring to reduce the risk of fines for non-compliance. It will be interesting to see how social media evolves in the investment management industry and in other highly regulated industries such as healthcare and public utilities.