The following is an edited transcript of the webcast “Compliance-savvy ways to use social media,” held July 13 in New York. It was moderated by InvestmentNews deputy editor Evan Cooper and reporter Davis D. Janowski.
InvestmentNews: Obviously, compliance officers are very concerned about the use of social media, particularly by registered representatives. Erin, give us some background about the law that covers this area now and why so many broker-dealers are hesitant about allowing reps to engage in the use of social media.
Ms. Reeves: As I'm sure all of you know, the Financial Industry Regulatory Authority Inc. recently released Notice 10-06, trying to address the influx of social media and how it can best be used — or rather, perhaps not used — by reps. In general, several NASD rules cover communications with the public and record-keeping requirements, and several of these are [brought into play] by the use of social media.
First, there's Rule 2210, which governs communications with the public generally. Part of the definition of “communications with the public” includes public appearances, and part of that definition includes participation in an interactive electronic forum. A lot of the social media that come under the rule do so through this part. Rule 2210 states various requirements for approval of these communications, record-keeping requirements, filing and content requirements. I'm sure most of you are very familiar with the gist of those.
There also are general record-keeping requirements implied by the Securities Exchange Act of 1934 — or that are imposed by that act with Rules 17a-3 and 17a-4, and also by NASD Rule 3110. Again, communications through social media are going to probably fall under these and require some record keeping.
The next rule is suitability, which is making sure that recommendations are suitable for the person to whom they are made. Again, the concern with social media is that any electronic communication can become widespread merely with the click of a mouse. That has some people nervous about suitability determinations and making sure that everybody who receives these recommendations has, in fact, been determined to be suitable.
Next, supervision responsibilities are also implicated. NASD Rule 3010 requires that members have systems to supervise the activities of their reps.With social media, this is a big area — having written policies providing for what reps are authorized to do, what's looked down on, what's encouraged, things like that.
The Finra notice to members touches on third-party postings to websites that might be maintained by members.
If a firm has involved itself in preparing the content of the communication that the third party has posted, Finra might deem that the firm has entangled itself in it, and then it will be a communication with the public on behalf of the firm. If a member firm has somehow indicated that it endorses or approves the posting of the third party, that is considered adoption.
So those are the main areas that the [Finra] regulatory notice touches on. Most of our clients have elected not to allow their reps to do much in the way of social media until they see how Finra is going to enforce these rules.
I think clients are sitting back and waiting for somebody else to take the first step. That's the impression we are getting.
InvestmentNews: Has Finra taken any actions with regard specifically to social media?
Ms. Reeves: I'm not aware of any at this time.
InvestmentNews: Julie, tell us a bit about what you and your firm are doing, which seems somewhat unusual, and tell us about your experiences with social networking.
Ms. Gebert: We started looking at social media about a year ago, and at that point, there wasn't any technology, so our firm took a stance like many other firms. We allowed limited use of LinkedIn, where it had to be submitted as advertising, and no recommendations [were] to take place, and that was it. But as part of our effort to focus on advisers under 45, one of our main initiatives for 2010 is to be able to find a way to make social networking available through the firm.
According to a [Rydex Investments] survey, 42% of the responding advisers said they were using LinkedIn, 27% were using Facebook, and 13% were using Twitter.
InvestmentNews: But since most firms don't permit or don't encourage reps to use social media, don't you think most reps are doing it away from work?
Ms. Gebert: Yes, absolutely, which shows the demand. From a firm standpoint, we would much rather put the [social-networking] technologies in place so that they can use them correctly and in accordance with the guidelines that Finra establishes.
For that reason, we created a social-networking task force and put out a survey to all of our rep advisers asking what they wanted. By far, the three vehicles that they were most interested in were Facebook, LinkedIn and Twitter — Twitter being a distant third, by the way. Facebook and LinkedIn were definitely in the forefront.
Then we asked how they would like to utilize it, and I think some of them thought we were maybe trying to trick them, because 70% said they didn't have any focus at the time. We really weren't trying to trick anybody; we really just wanted to see how they would use it.
Among preferred uses, helping put out newsletters and information for their clients, ranked the highest at 24%. And we realized after that, one of the downfalls of having a compliance person putting this together is that the choices we gave didn't include referrals. Referrals are probably one of the hardest things for a rep adviser to do. It's very uncomfortable to ask a client directly for referrals, and the social-networking sites create a real, very natural referral market for them. Clients' friends are be able to see the posts — on Facebook, for instance — that a rep adviser would make. I think that's really going to increase.
I was also interested to see that seminar advertising scored well. I thought that was a natural for social networking. And I was interested to see that recruiting scored as highly as it did, as well.
InvestmentNews: How do they think they would use it for recruiting?
Ms. Gebert: Probably mostly through the use of LinkedIn.
InvestmentNews: What have they actually been doing?
Ms. Gebert: To monitor their activity, we contracted with a company, Socialware [Inc.], and have been in the pilot phase for a little over a month. I don't need to be a walking advertisement for Socialware, but it's doing everything they said it would.
InvestmentNews: Tell us how it works.
Ms. Gebert: From a rep adviser standpoint, you sign into a portal, and from there, you can go back and forth between Twitter, LinkedIn and Facebook. So you just need to log on to the portal one time, and it captures all the rep's activities. We're able to set our policies and procedures in the background, and be able to tell exactly what they're doing.
Socialware has done a fabulous job of breaking down all the different elements that you can do within Twitter. Finra has identified the biography on the profile for Twitter as static content. Thus, it's going to be considered an advertisement. While Socialware makes recommendations, every firm chooses its own policies and procedures. Obviously, you have to pre-review the material and then archive it.
Finra considers posts for a “tweet” as interactive communication, so with that, we can have a post-review.
InvestmentNews: In other words, you monitor the tweets, but you don't approve them beforehand?
Ms. Gebert: Correct. They end up being just like a public appearance, where you don't have a scripted presentation. Radio shows, anything of that nature, would be submitted to us afterward. They have fabulous reports for all the tweets we monitor — in fact, every aspect of the social networking that has taken place during the day.
InvestmentNews: Do reps do many things during a typical week that raise a red flag, and how often do you have to get on the phone and say, “You can't do that”?
Ms. Gebert: Actually, knock on wood, so far, so good. The reason we still consider ourselves to be in a pilot phase and haven't rolled it out to all of our rep advisers is that we found that besides being able to provide the technology, we also need to provide our rep advisers with marketing support. Because they've been told that they couldn't do this for so long, they didn't assimilate it into their marketing plans. So now we're putting together templates of different profiles for them to utilize, to see what audiences they are trying to target, and make some recommendations.
We're going through various white papers on some of the more effective methods in marketing through social media. We're also going to be having a speaker at our national conference in September to speak on just this subject in one of our breakout sessions. We have a feeling that it's going to be very well-attended.
InvestmentNews: Erin, are you getting more inquiries from securities firms asking you to either vet their plans or to see where they might be able to get involved in this without getting into legal trouble? Any feelers from securities firms in this area?
Ms. Reeves: Yes, we're definitely getting inquiries from some of our clients, and we're trying to work with them to develop policies that are within the scope of the rules.
We've had some general rules that we have discussed with our clients, the first being: “Don't use a social-media tool unless you fully understand it.”
We encourage clients to have very detailed and strict policies, and to communicate those policies very clearly to their reps so they don't have to worry about any violations.
And we try to emphasize to all of them that just because they hear about another broker-dealer doing something, don't do it yourself. Don't assume that their use is compliant. Given the focus that Finra is probably going to place on this, it's worth the time to make sure that firms vet their procedures and make sure that they're fully compliant.
Let me give you a couple of examples of things that firms are thinking of putting in their policies. One is requiring reps who are on Facebook to be “friends” with the compliance officer. That way, the compliance officer can monitor what's going on via his or her Facebook page.
We're requiring that Facebook pages have the standard disclosures placed on all other communications — such as those at the bottom of e-mails.
Also, firms should make sure they're aware of the recipients of all their reps' communications.
We are trying to help our clients develop policies, making sure that they have those main rules in mind as they do so.
InvestmentNews: A question from the audience: What if someone feels frustrated by their firm's prohibitions and decides to use social media without making recommendations. Where does that fall?
Ms. Gebert: I spoke with a Finra district director, and basically, if someone is going to use a social-media site and say that he or she is a financial adviser, the disclosures have to be there. If they want to have one that's personal, it has to be personal. And unfortunately, they aren't going to be able to say that they are financial planners on that one.
The minute they say that they are a financial planner, it becomes securities-related and must go through the procedures a firm puts into place.
Ms. Reeves: If you say you're an investment adviser, you've got to keep compliant with everything.
InvestmentNews: Erin, have any clients or potential clients come to you with a very specific plan in how they are going to use social media? One LinkedIn feature popular with both brokers and registered investment advisers is an answers section where they can contribute to the pot of global knowledge, if you will. They're not really giving recommendations as much as just answering questions. Have clients asked about specific features like that? And is there a potential for problems when using such features?
Ms. Reeves: I haven't had any questions about that specifically. I get more-general questions about dealing with “the new beast” of social media and staying compliant. Something all of our clients must avoid is trying to get around the rules because they think they're not technically giving advice. Most times, you probably are, even if you don't think you are, and Finra is going to think you are.
InvestmentNews: An audience question for Julie: Do you pick up the cost of Socialware or do you delegate it to the rep advisers, and is it expensive to monitor all this stuff?
Ms. Gebert: The cost is going to be passed on to our rep advisers; to monitor all three of the sites will be $20 a month. My assumption is that an office will probably sign up for those sites rather than individuals, because they'll want to market their business.
InvestmentNews: Is storage a strain on the firms' data facilities?
Ms. Gebert: No, because Socialware is archiving all the information.
InvestmentNews: Another audience question — what about blog posts? Erin, will you give us some guidance here?
Ms. Reeves: That question raises the distinction between real-time and static postings. Static postings are considered to be advertisements. They have to be pre-approved, just like any other advertisement. So you really want to be cautious about that. Anything on a blog that would be considered to be a static posting would raise red flags.
Then there are postings made in real time which are more akin to the tweets that Julie was talking about earlier: They're still communications with the public, but they're not advertisements, so they don't have to be pre-approved.
My other overarching concern about blogs involves the kind of representations you have on there. Are you stating that you are a financial adviser? Are you stating that you're giving advice? What kind of products are you talking about on your blog? We would recommend, for instance, that social media never be used to talk about a private-placement offering, considering all the issues that arise with those types of offerings.
So another thing to be concerned about with blogs, besides the static-versus-real-time and advertisement-versus-communication distinctions, is the general content.
InvestmentNews: Julie, maybe you can answer this. Quite a few RIAs have blogs that they update several times a day. When it comes to reps who might want to do this, where does Cambridge stand? I don't think that that is something that you can monitor on Socialware. Is that correct?
Ms. Gebert: That's right, we can't monitor blogs.
InvestmentNews: Do you allow reps to have blogs at all?
Ms. Gebert: They would have to follow the Finra rules on that. And so all the blogs, if they are allowed, must be submitted for advertising.
InvestmentNews: We were talking a bit earlier about some of the social-networking software and monitoring tools that are available.
Socialware is interesting because it has more than just financial services clients. Another well-known archiving tool is Arkovi [from BMWR & Associates Inc.] which has added some monitoring features and may even offer a pre-notification tool. But it is still more of an archiving solution than Socialware in that it just collects everything you've done. At Socialware, they call themselves a “middleware” solution in that they fit in the middle between the adviser rep who wants to do the social media and the broker-dealer who's going to be collecting it, or at least filtering it all.
From there, though, really, you're talking about the enterprise solutions and companies like Dexrex [LLC] that do it for all kinds of Fortune 500 companies.
Ms. Gebert: Arkovi would probably work for an RIA firm or for a smaller broker-dealer that has everybody on the same server.
Being an independent, we've got 2,000 different servers all over the country. So we had to find a solution that was able to work around that.
InvestmentNews: It's a good point, because independent broker-dealers deal with hundreds of advisers and reps, all with their own systems. LiveOffice LLC and Smarsh Inc. were working on a solution but found that it was going to be difficult and probably expensive to develop. They have since dropped their own initiatives and partnered with Socialware.
Julie, what are the advisers who are using social media doing that seems to work — whether it's recruiting or networking or getting referrals?
Ms. Gebert: Well, we are only about six weeks into it. But the most success I have seen involves one of our offices in a large metropolitan area that does a weekly radio show. They're now able to tell listeners to look for them on LinkedIn and Twitter and Facebook.
They also do a great deal of seminars, and about once a week, they do a posting of their seminars that kind of catches people up on market events. Potential clients are then seeing these posts again on their friends' pages.
As a result, they've probably gotten more clients from Facebook already than they did from their radio show and seminars, because anytime a client or a potential client sees something a few more times, it begins to resonate. And sometimes they have to see it through different mediums before they choose a particular financial adviser.
InvestmentNews: Sort of like electronic word-of-mouth. It's a referral in a way, but not saying “Yes, he's my adviser, and he's great,” it's more like, “He is my adviser, and he has interesting information.”
Ms. Gebert: Even posting pictures from a client appreciation event can be powerful. Like most independents, our rep advisers are very involved in their communities, so if they post pictures of things that are happening in their community, some charity event that they participate in alongside their clients, even just taking clients out for their birthdays and posting those pictures on Facebook, it shows their clients' friends that the adviser treats the person as a friend and family member, not an account number. People want to be a part of that — which makes for very natural referrals.
InvestmentNews: Using social media does seem to create a bigger presence for the adviser online and cement his or her ties to existing clients — which, again, encourages referrals. Julie, for the compliance officers out there, how much of your day is now devoted to social media?
Ms. Gebert: We're handling social-media compliance within the advertising area, and right now, there are only about 25 people using it, so it takes only a small amount of time. We're keeping a very close eye on the numbers, and we've been told that if they need to hire another compliance person for marketing purposes, the firm would be more than happy to do that.
One thing that rep advisers should keep in mind is that with social networking, a little can go a long way. Everyone knows their clientele, and so they need to evaluate how best to market to them. Personally, I am hooked up with a few different businesses on my personal Facebook account. And truthfully, if I see more than a weekly post and I'm getting bombarded with things, I'm actually going to delete them from my profile. [If that happens], you haven't done any good. Reps should probably post no more than weekly so people have time to actually read the post and pay attention to it; otherwise, they become numb.
Are we putting a policy and procedures in place to control that? No. It's up to the advisers; they know their clientele. Some people with heavy stock portfolios may need to have more-constant communication, and they'll know what their clients want. But I just know for myself, anything more than one a week would be too much.
InvestmentNews: Are there any security issues involved with posting a client's photo on Facebook? Is there any betrayal of client confidentiality in doing so? Say you have clients at a party — can you show them? Erin, do you need a signed permission slip from all of your clients before you can post their photos?
Ms. Reeves: Yes, I would get that.
InvestmentNews: Julie, has that issue come up?
Ms. Gebert: No, that hasn't, but it is a good point. For those types of events, I would probably create an opt-out where a client needs to notify you if they don't want their pictures posted. Truthfully, I think it's happening now, where photos of appreciation events are being published on the client's website or the rep adviser's website. So I don't think it's really any different; it's just on a different medium. But yes, the same items would go into play there.
InvestmentNews: Do you ap-prove all the photos beforehand?
Ms. Gebert: Yes, if it's a static photo, it's going to be submitted through as advertising.
InvestmentNews: In which of the three social-media sites in the pilot has there been the most interest so far?
Ms. Gebert: I think Facebook has elicited the most interest. We were seeing a lot of interest in LinkedIn earlier, but LinkedIn is really turning out to be a professional networking site and probably is not aimed at client gathering. I think people are still trying to figure Twitter out, to be honest with you.
InvestmentNews: Somebody is on from Arkovi, and he disagrees with you a little bit, Julie. He says, “We have a SaaS solution that is working with very large as well as very small clients in one to 2,500 users. No restrictions on that front.”
Ms. Gebert: I thought it had to be on the same server in order to meet the requirement. But I know they are mostly archiving. They do a very good job on archiving solutions, which would be easier to be in compliance with Finra rules if you're all on the same server.
InvestmentNews: One of our attendees is asking about a local listings website where an adviser can get fans and post reviews. It would seem that the rules prohibit requesting that someone become a fan or write a review. Is that true? If they do it voluntarily, is it just part of the greater testimonial? In other words, if someone posts an unsolicited testimonial, is that permitted?
Ms. Reeves: It seems more like the third-party situation that I was talking about earlier. Like I said, a positive comment from a third-party is generally not going to be deemed to be something that you did yourself. But there are issues here involving the theories of entanglement and adoption.
Until we get some movement from somebody taking the first step and seeing what's permissible and what's not permissible, that's got to be a judgment call to look at the content: Do you think it really crosses the line?
Obviously, you want people to be enthusiastic about you, and you don't want to necessarily delete anything that's really endorsing you. But I think you just need to be careful about what they say about you — and whether it could be seen by Finra to be something that's not compliant.
Read or listen to the full webcast at InvestmentNews.com/socialmedia.