Think before You Tweet

January 11, 2010 --- FINRA, SEC not yet clear about social networking ---

Last year this time, only a fringe crowd of the Internet population was on the microblogging Web site Twitter—many advisers might not have even heard of it. While it still only attracts a minority of Internet-using adults, the number of users grew exponentially as consumers turn more and more to the Internet and social media for conversations and information about everything from recipes to retirement.

And it’s not just young people who are spending more time on the Internet. In the last five years, the number of seniors actively using the Internet increased by more than 55%, from 11.3 million active users in November 2004 to 17.5 million in November 2009, according to Nielsen. At the beginning of last year, Facebook reported that its users over the age of 35 doubled in 60 days.

Using social networking tools (such as LinkedIn, Facebook, Twitter, and blogs) might seem like a natural extension of the financial advisory business, which is built upon reaching out to people. However, financial advisers and their firms are understandably hesitant about using it in their practices because of the regulatory risks.

When people step out into the Internet, they might forget they are part of a regulated world, said Dan Bernstein, director of professional services at MarketCounsel in Englewood, New Jersey. For advisers, the first challenge is knowing what regulatory world you are in; the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have different things to say, and state regulators and internal compliance departments might add even more layers. While independent registered investment advisers (RIAs) might have more freedom from internal controls than advisers in the broker/dealer channel, they still have regulatory risks. Bernstein summed it up: “You need to know who’s regulating you, who’s watching you, who wants prior approval, who doesn’t.”

Both the SEC and FINRA are somewhat vague about social networking rules, letting them fall under broader rules about advertising and Internet communication. (They are obviously aware of social networking sites, as they both send news updates on Twitter.) However, last fall, FINRA said it created a task force to examine how it can welcome new forms of communication, such as social networking, while still protecting investors (see “FINRA Forms Social Networking Task Force”).

Further, last year, FINRA offered some guidance to broker/dealers and their registered representatives in a podcast series about electronic communication, and one podcast dealt specifically with using social networking, offering some generic tips (see “FINRA Guidance about Social Networking”).