As you likely know by now, FINRA yesterday published Regulatory Notice 11-39 Guidance on Social Networking Websites and Business Communications. This guidance updates Regulatory Notice 10-06 Guidance on Blogs and Social Networking Web Sites.
Many agree with The Wall Street Journal’s characterization that the guidance provides finer points on how firms and FINRA-regulated financial advisors use the site. The consensus is that it doesn’t change any of the already articulated rules.
I am the furthest thing from a Compliance expert. But for as long as I was inside a FINRA-regulated firm and definitely now that I’m out and trying to help FINRA-regulated firms communicate, the least I can do is know the rules. In the last 24 hours, I’ve read the guidance and the analysis that’s surfaced so far. At the bottom of this post, you’ll find excerpts I’ve extracted from Bill Winterberg's FPPad.com, FA-mag.com, HearsaySocial.com and kasina's blog. Be sure to follow the links to read the full comments.
A Logo On Another Site Represents Adoption/Entanglement
While most of this new guidance expands on the parameters that were first published in January 2010, what I’m hoping to learn more about is new narrative on “co-branding a third-party site.” I can think of scenarios where this would clip the wings of a financial advisory firm seeking to support an online or offline business or local community. But it’s even more relevant for mutual fund and exchange-traded fund (ETF) marketers.
Here are the relevant questions:
Q10: To what extent is a firm responsible for any third-party website that the firm or its associated person “co-brands”?
A10: Under NASD Rule 2210, a firm that co-brands any part of a third-party site, such as by placing the firm’s logo prominently on the site, is responsible for the content of the entire site. Under these circumstances, FINRA considers the firm to have adopted the content on that site. A firm is responsible under NASD Rule 2210 for content on a linked third-party site if the firm has adopted or become entangled with its content.
Regulatory Notice 10-06 describes the “adoption” and “entanglement” theories as they apply to third-party posts on a firm’s social media sites. FINRA considers a firm to have adopted content in a third-party post if the firm or its personnel explicitly or implicitly endorse or approve the post.
Q11: When is a firm not responsible for the content on a third-party site to which it links?
A11: A firm may establish a link to the site of an independent third party without assuming responsibility for the content of that site under NASD Rule 2210 if:
- the firm does not “adopt” or become “entangled” with the content of the third-party site; and
- the firm does not know or have reason to know that the site contains false or misleading information.
In other words, co-branding—which FINRA describes as placing a logo prominently on another site—represents adoption and entanglement and exposes the firm to liability for the content of the site. What am I missing here? Isn’t placing a logo on another site advertising (versus social media)? But more important, does this represent a new limitation?
I searched through all the materials I’ve saved since January 2010 and can’t find a mention about FINRA, co-branding and social media. So, I think I’m safe in saying that this is a new idea being introduced in Regulatory Notice 11-39. But why? Surely, there are allowable limits for co-branding that stop short of holding the marketer responsible for the content of a third-party site.
Investment regulation specialist attorney Larry Stadulis of Stradley Ronon Stevens & Young told me via email this morning that he's concerned about the scope of this Q & A, too. He'd already asked FINRA for clarification.
A relatively safe guess is that the co-branding statement is more broad than was intended. It's unfortunate, though, given the time that elapsed between Guidance 1.0 and 2.0 and the confusion/anxiety that already surrounds the industry's consideration of social media. I'm sure we'll all feel better when FINRA clarifies.