By Bart Mallon
Futures Magazine, August 1, 2011
Social media has been at the forefront of the news with LinkedIn’s IPO, Facebook’s expected IPO in 2012 and, of course, the unusual and self-destructive use of Twitter by former U.S. Rep. Andrew Weiner.
The use of social media is an important marketing and business tool because it has the ability to reach such a wide audience. Although there are undoubtedly potential advantages, regulated firms, especially Commodity Futures Trading Commission (CFTC) registered firms that are members of the National Futures Association (NFA), must realize there can be pitfalls if applicable rules are not followed. Of course a big challenge is understanding how applicable rules apply to a phenomenon that is only a couple of years old. This article details those rules, discusses some of the issues with using social media and hopes to help firms avoid potential pitfalls.
Most regulations are applicable only to certain regulated firms. In the managed futures space, NFA member firms will need to be aware of certain NFA rules that relate to social media. These rules fall into three broad areas: Supervision of employees (Rule 2-9); requirements with respect to promotional material (Rule 2-29) and, certain recordkeeping requirements (Rule 2-10). Together this trio firmly puts the onus on firms to demonstrate the existence and implementation of robust policies governing their use of social media.
First, firms need to keep in mind that there is a general prohibition against any communication with the public that is fraudulent, uses high-pressure sales tactics or states that futures trading is appropriate for all persons. Second, “promotional material” is subject to a number of additional requirements. The term “promotional material” generally is defined to include any communication over an electronic medium that is disseminated or directed to the public concerning a futures account. The term typically also will include standard letters, publications and other kinds of written material dealing with a firm’s futures activities. Promotional materials must include certain standard disclaimers. Finally, a firm will be required to maintain certain books and records with respect to social media.
Because many parts of the NFA rules are drafted broadly, the NFA has recently provided specific guidance on the use of social media and implementing related compliance policies. In general the guidance provides more color on how the NFA rules relate to certain social media uses. The guidance also reaffirms the need for firms to implement social media compliance policies and update periodically as necessary.
Creating, implementing and periodically updating social media compliance policies and procedures will help significantly when and if a firm is subject to an examination by the NFA. An NFA exam involves a back-and-forth information and document request process with the NFA prior to, during and after the actual in-office review process. During an examination, the NFA will review everything — all firm and employee social media accounts, tweets, re-tweets, links, profiles, etc. The NFA always will include a request to see the firm’s procedures manual and that manual will need to include the promotional material review procedures among other items.
Even if a firm does not utilize social media, the NFA will be reviewing all aspects of the firm’s website and other electronic communications, such as emails and instant messages. If a firm does utilize social media, the review will focus on all the ways the firm uses the medium. It is important that a firm is able to support all statements made on social media sites and the internet in general. The NFA will ask for documentation supporting any statements made by the firm or employee. Auditors also will review the LinkedIn accounts of all the employees of the firm, including the principals. If there is information that is inaccurate or out of date, the NFA will ask to have the information updated.
Firms should remember that social media really cannot be divorced from promotional material. Periodically the NFA hosts various compliance seminars where they discuss some of the common deficiencies with respect to promotional material. One recent seminar noted that common deficiencies include: Opinions not clearly labeled as opinions; past trading performance not being correctly reported (and with appropriate disclaimers) and improper discussion of the firm on third-party websites.
The way groups use social media to promote their businesses constantly is evolving as the number and variety of sites increase. “What’s the buzz” describes the most popular sites and how they are used.
General social media issues
Although each of the platforms mentioned in “What’s the buzz” is a unique medium, there are certain similar issues firms need to focus on relating to general communication, best practices, feedback from participants, integration and monitoring employees.
“If you have to ask, it is…” (below) lists general requirements for promotional material. The informal nature of social media may cause some firms to drop their guard regarding this type of communication. But if a firm is subject to NFA rules, then anything the firm posts to a social media website needs to meet the requirements for all promotional material and discussions with the public.
In addition to the specific regulatory requirements, there are some best practices that are important to remember and are applicable to both traditional and social media. “Watching your ‘P’s and ‘Q’s” (below) lists some of these best practices.
Feedback and integration
A firm is responsible for items posted by others to social media that the firm controls. This means that a post to the “wall” or other similar space on the firm or employee’s profile should be reviewed for compliance with the general standards for promotional material. If there is material that does not comport with NFA guidelines, that material should be removed. Firms will need to monitor comments regularly on blogs and other discussion forums that allow the general public to comment. In the event that commentors post comments that violate NFA rules, such comments need to be immediately removed from the medium and the firm should have procedures in place to ban individuals who violate rules on a consistent basis.
Many social media sites are strongly integrated with one another. For instance, a person may have accounts set up so that when the person sends a tweet, their LinkedIn and Facebook accounts will be updated automatically. If a check-in application is used (Facebook or Foursquare) similar updates may be posted to the various sites. Such integration may create unintended context issues. For example, a simple tweet may meet regulatory requirements, but if it is pushed to another service where the context makes the tweet misleading, the firm still ultimately may be liable for making a misleading statement.
Controlling employee use
It is vital for a firm to have clearly defined and observed policies for regulating employees’ use of social media to control the manner in which employees represent themselves on the Internet. Some firms may have policies that require the employers to have access to all employee personal blogs and accounts (Facebook, LinkedIn, Twitter, etc.) or their feeds. Some firms will not go that far, but those firms still will be responsible for monitoring the employee controlled pages and ensuring that NFA rules are observed. Periodic testing of employee controlled pages should be part of any social media compliance program.
In addition to the general matters that firms should be aware of, the following sites have medium-specific issues that firms need to recognize and appropriately plan for.
Twitter: Micro blogging sites like Twitter may present the most challenges for compliance officers at NFA firms. With only 140 characters it is hard to make sure that a tweet has the necessary balance, context and disclaimers (if necessary) that reasonably might be required for a statement if it was made in other mediums. Firms also need to think about policies on re-tweets — both with respect to their own tweets and initiated re-tweets. A tweet may meet the necessary context requirements, but perhaps a re-tweet does not. There also may be requirements for firms to track other users’ re-tweets of their original tweets.
YouTube: YouTube videos are essentially TV ads and will be treated as radio and TV ads if there is a discussion of past or potential profits. This means that the firm will need to submit the proposed video to the NFA for review at least 10 days prior to posting to YouTube.
Chat rooms and forums: Discussions in chat rooms and on forums are potentially public communications and promotional material. If a firm controls a chat room or forum, the firm will need to monitor the posts by others consistently to make sure there are no violations of applicable rules. The firm immediately should delete any misleading or fraudulent posts and should ban users who repeatedly violate rules or engage in egregious behavior. Discussion of specific stocks or futures markets can become dicey here as they can constitute a recommendation, which increases necessary regulatory insight.
Importance of compliance
We have discussed a number of issues that should be considered by firms when using social media. However, the regulatory issues involved in social media are changing constantly as new ideas emerge and new ways to communicate are developed. While some of the underlying compliance concepts will be universal, distinct application of regulations will be made under the classic “facts and circumstances” of any particular situation. Because there are many situations in which the application of rules or regulatory concepts are opaque, it is important to think about the consequences for a social media campaign.
As the regulation of social media increases, more concrete guidance will be available. Additionally, software solutions will be developed and become a more central part of each firm’s compliance procedures. Until there is more certainty in this area, firms would be well advised to take care when implementing social media programs, and should certainly do so only with guidance from a lawyer, compliance consultant or a discussion with your regulator.
What’s the buzz
LinkedIn is the central tool used by business people to create and manage their personal business identity. The site enables individuals to create personal profiles to showcase their current job and past experience. Businesses can establish company profiles. Both individuals and businesses can post updates and links to third-party sites.
Twitter is a social networking and micro-blogging site that allows users to post to the web messages up to 140 characters long, known as “tweets.” Account holders post tweets, follow others’ tweets and re-tweet messages to their own followers. Tweets are often used to introduce a subject and then link to a longer communication.
Facebook is the world’s largest social networking site, with more than 600 million global users. Users can share thoughts, links and pictures with other users (“friends”). Individuals and businesses can have profiles and pages allowing the user and the user’s friends to post information to a “wall,” share photos, provide basic information about the user and chat with friends.
YouTube is a video sharing website where individuals and business can create a profile and then upload, share view and comment on videos. Profiles can provide background information on the person and include background description of the person or their business.
Bart Mallon is a partner at Cole-Frieman & Mallon LLP. His practice focuses on the investment management industry, and clients include hedge funds and other asset managers. The practices discussed in this article do not constitute legal advice.
Question: Pursuant to the Jobs Act, the Securities Exchange Commission recently revised Federal regulations to allow hedge funds publicly to advertise to the general public so long as they accept investments only from accredited investors (i.e., certain high net worth individuals and legal entities). Likewise, companies will be permitted to advertise to raise equity-based capital. Those changes as they pertain to accredited investors become effective fall 2013. New regulations for all investors regarding crowdfunding are expected to be released in 2014. Some critics believe that permitting more widespread investment-related advertising is problematical because the advent of social media marketing may present too many challenges for protecting the interests of the general public. What do you think?