The landscape of communication has changed drastically in the past decade. Information has the capability of widespread reach through the use of various sources. In particular, social media has become an important channel of communication. As such, the SEC has recently issued new guidance that allows financial firms to disseminate market related news via social media so long as firms alert investors which social media platforms will be used to deliver such information. Financial firms’ use of social media must be in compliance with Regulation FD which “requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively…to ensure that all investors have the ability to gain access to material information at the same time.”
Another emerging issue in the height of social media is employee privacy. Recently, various states have made efforts to curtail employers’ attempts to monitor employees’ personal Facebook and Twitter accounts. California, Illinois, Maryland, and Michigan adopted social media privacy laws last year while a similar law in Utah takes effect in May. Variations of social media privacy laws have been introduced in 35 states since the beginning of 2013.
Securities regulators, however, have requested states to carve out exceptions in such state laws so that certain financial firms can maintain a close watch of the social media accounts of its employees in order to monitor whether personal accounts are being used to give investment advice. Regulators such as FINRA worry that social media networks can create new channels for Ponzi schemes and other frauds and ultimately put investors at risk. According to a survey conducted by American Century Investments, approximately one third of financial advisers use some form of social media several times a week to interact with investors.
Before California’s employee-privacy laws took effect at the start of the year, FINRA and other related groups requested that either the law be vetoed or an exception carved out for financial firms. California rejected this request. California’s law prohibits employers from requiring or requesting employees’ to: (1) disclose his or her username or password for the purpose of accessing social media; (2) access personal social media in the presence of the employer; or (3) divulge any personal social media. Employees cannot be disciplined, terminated, or retaliated against for non-compliance if an employer makes such a request.
Some state laws provide a narrow exception for employers to conduct legitimate checks of an employee’s personal social media accounts during a formal investigation of an employee’s alleged misconduct. Nevertheless, securities regulators and financial firms would rather get in front of the issue and monitor employee’s conduct before it rises to the level of a formal investigation or before the potential harm to investors has been done.
Securities regulators believe current employee-privacy laws are at odds with existing rules that require financial firms to monitor any investment advice that is posted or tweeted by employees. Financial firms have found themselves between a rock and a hard place when it comes to the issue of employee privacy and compliance with regulations and will likely be faced with deciding whether to violate state law or SEC and FINRA regulations.
Courts have yet to decide whether FINRA rules will supersede state law on this matter.
For further guidance on how financial firms can work within the bounds of state laws while maintaining its obligations to FINRA contact the experienced attorneys at Cosgrove Law Group, LLC.