Can your Broker be your Facebook Friend?

Having spent many years in a financial services company, I understand the culture of a highly regulated industry.  We in the US regulate many industries — it is a reflection of our values.  We regulate air travel because we want to fly safely.  We regulate pharmaceuticals because we want our medicines to be safe.  Safety is a high value in our society.  We regulate the financial services industry too.  I’m told FinServ is more regulated than any other industry — at least in the US.  I guess this means money is an even higher value.

We want our marketplaces to be safe and fair.  Regulation seeks to accomplish this with protections that prevent brokers from, say, conning people out of their money.  For this reason, brokers have very strict rules about their advertisements.  These rules also apply to their websites — which are, in effect, their online billboards.  They cannot say “buy this stock, and we are really sure that you’ll earn 10% return on investment.”  It is misleading.  So putting content on a broker’s website requires prior review and approval.

Enter Social Media and User-Generated Content.  Can brokers set up blogs?  What about the comments that people post to their blogs?  Can brokers give financial advice on discussion forums?  What if a broker sets up a forum where all their misleading advertising gets magically erased whenever a regulator visits the site?  Sure, when you think of all the bad things that could happen, you may be glad this industry is regulated (of course those who got swindled wish the enforcement would be more effective).

But then you wonder — why can’t brokers just extend their practices onto the new social channels?  It’s not so simple.  And for this reason (and a couple of others), the Financial Services industry has been late to the table in the social media space.

Part of the challenge is that  some people see social media as the emergence of conversations (“Markets are conversations” — The Cluetrain Manifesto).  Whereas others realized that many companies (and their marketing agencies) are simply implementing ads inside of social media sites.  Sure you and I know that this is a misuse of social media.  But given that it is a very prevalent misuse, why reward the perpetrators with lesser regulations?  If they are going to spam Twitter and Facebook with ads, then those ads should be regulated as ads, and not be given lighter treatment just ‘cuz they are on social media.  In fact — had it not been for these regulations we’d see tons more crappy spammy ads on social media sites from brokers.

There’s a difference between ads and conversations.  In the US, a brokerage company must have their ads reviewed and approved (via some process I don’t know much about).  But a broker is allowed to have a conversation with an investor without those words having to be pre-approved.  In both cases, however the content is subject to regulation.  But how does this apply to socially mediated conversations on blogs or Facebook?

Just this week, the Financial Industry Regulatory Authority (FINRA) provided some clarity that I hope will help move things along.  You can read their note here.  I’d like to summarize what I gathered from it:

1. Some Brokerage Firm employees are Registered Representatives — these are the ones we regulate very strictly.
2. Their public statements are called “Public Appearances” — these are regulated speech.  A statement is a statement regardless of whether its on TV, a cellphone, IM, chat room, email, blog, tweet, or the newspaper.
3. Brokerage firms have to retain records of their communications.  So if they blog, they have to be able to record those blogs in an approved manner so that it can be retrieved in the event of an audit.  So setting up a default Wordpress on a server (like with my blog here) is not good enough.  They need to backup the database in a compliant manner.  Solutions are out there that do this.
4. Firms have the responsibility to watch what their brokers say and do online.
5. There is a difference between an advertisement and a conversation.  Both need to be supervised, but only the former needs to be pre-approved.
   • When it comes to blogs, FINRA sees that some blogs are just advertisements in blog form and other blogs are conversational.  So the rules apply based on the type of blog — which seems to introduce human judgment.
   • When it comes to Social Networking sites, FINRA sees that the sites contain both advertisements (static content like your profile info and twitter background) and conversations (wall updates, tweets etc.).  Basically: The ad rules apply to the ads, the conversation rules apply to the conversations.
6. Firms must train employees to ensure they comply with Social Media usage policies — i.e. are only using supervised sites, for business purposes, properly.
7. The status of someone’s comment on a firm’s blog or Facebook wall is not so simple.  In some cases it’s viewed as a comment, in other cases it’s viewed as a client communication (subject to specific retention rules), and in other cases it can be viewed as the firm’s own communication.

There’s more to read, this is just my summary.

What this means:  FINRA has taken the step to help brokerage firms participate in social media.  Brokerage firms will need more help.  Training requires people who understand both Social Media and the FinServ industry (hey — someone like me).  And the fact that so many are using social media to push ads has got to stop  – it’s just going to make their customers turn away.  So brokerage firms are going to need  to get a dose of strategic realignment before they get out and poke us on Facebook.

Next week I’m going to be speaking at the Boston Security Analysts Society about this and other related topics.  If you are around, stop on by.  If you want to set up a conversation about this topic for your firm — let me know.

Tagged as: analysts, blogging, confusion, expert, marketing, presentation, social media, social network, Twitter