Social media considerations for financial firms

July 31, 2011 07:00 PM

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.

Regulatory background

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.

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About the Author
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.