Facebook Faceoff; Regulators Tackle Social Media

For the past several years’ social media sources such as Facebook, MySpace, and YouTube have been the centers of attention for marketers the world over. Beyond the so called “big three” social media players, similar more user specific sites like Twitter, LinkedIn, and other various industry blog networks have also emerged as useful tools for promoting a business or brand. As a financial firm there is no doubt that your company has used, or at the very least considered, any number of social media venues to grow market share. Although these media resources continue to gain in popularity one nagging question still remains; can they be used in the financial industry without breaking the established public solicitation rules?

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Earlier this month the National Futures Association (“NFA”) submitted a rule amendment to the Commodity Futures Trading Commission (“CFTC”) regarding online media. Specifically the rule submission was intended to voice NFA’s opinion about what is, and is not acceptable use of social media venues for its member firms. This submission marked the first time that NFA has publically written its position on the topic and their response affects all commodity and forex firms. Furthermore with this rule NFA also invoked its “Ten Day” rule submission authority with the CFTC. This means that the CFTC had ten days to notify the NFA if it wanted to further review the amendment; no notice was provided. Thus, as the request was submitted on December 8th, 2009 the amended Rule 2-29(h) became effective just before Christmas of this year.

What the Rule Amendment Means

NFA Rule 2-29(h) was originally created to provide guidance to firms that engage in certain radio and/or television advertising. Specifically, the rule requires that television and radio ads be submitted to NFA’s promotional review team at least ten days ahead of their intended use. After last week’s amendment, this rule now includes all forms of audio and/or video advertisements which may be distributed through any type of media accessible to the public.

What this means is that 2-29(h) now covers all forms of electronic media not previously included as radio or television (i.e. the internet). Due to this change any online videos, tutorials, audio recordings, webinars, or other type of electronic media which may discuss trading recommendations, profit targets, or general trading results must be submitted for pre-review to NFA before public use.

For Further Consideration

At the same time 2-29(h) was amended, NFA also published an “Interpretive Notice” regarding the use of social networking groups. The notice discusses a variety of scenarios that arise when NFA members utilize social networks to communicate with public investors. The most important of these scenarios is NFA’s call for member firms to develop specific social networking procedures; something not previously required. Through this literature NFA has made public their feeling that social networking sites in most instances will be considered promotional material and will be subject to NFA Rules 2-9, 2-29, 2-36, and/or 2-39. According to the interpretive notice, NFA is requiring firms to address the following communication channels and provide methods by which they will handle supervising them via a new set of mandatory procedures. Specifically these new procedures must address the following items:

1. Chat Rooms
2. Forums (Bulletin/Message Boards)
3. Blogs
4. Social networking sites (i.e. Facebook, Twitter, MySpace etc.)
5. Audio/Video Sites (i.e. YouTube, MP3’s, Podcasts etc.)
6. Hyperlinks to third party resources

How to comply with 2-29(h)

The procedures mentioned above are required for all NFA member firms regardless of what types of promotional material they create. If your firm utilizes any type of electronic media or form of social networking it is imperative to create procedures that address the points above immediately. After doing this it is then critical that a full review of company promotional materials be completed by appropriate firm personnel. At that it must be determined if all promotional materials published adhere to the new policies and procedures which were created to address NFA’s newest rule amendment and interpretive notice.

Also please be advised that at this time NFA has not provided guidance as to what is required of video and audio materials created prior to the 2-29(h) amendment. More specifically, at present there is no way to know if your old video and/or audio materials will be grandfathered in to the previous rule or have become subject to pre-review submission under the amendment. Due to this lack of clarity it would be best to appeal to NFA in writing for further guidance if your firm has large amounts of outstanding audio or video materials in use.

As with most regulatory obligations determining how to remain compliant can be a daunting task for a trading company. The intricacies of creating new procedures that adhere to the rules can be difficult and cumbersome to work through. More importantly though, ensuring that all existing company policies and procedures meld together with the latest requirements will require a great deal of regulatory knowledge and ongoing monitoring. In a world of ever changing rules, the best next step decision most firms can make will be to seek professional regulatory help.

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