The SEC adopted a new rule today to place restrictions on short selling when a stock is experiencing significant downward price pressure. The alternative uptick rule (Rule 201) is meant to limit short selling from further driving down the price of a stock that has dropped more than 10 percent in one day. It will enable long sellers to stand in the front of the line and sell their shares before any short sellers once the circuit breaker is triggered.
The rule imposes restrictions on short selling only when a stock has triggered a "circuit breaker" by experiencing a price decline of at least 10 percent in one day. After the triggering event, short selling would be permitted if the price of the security is above the current national best bid.
Rule 201 includes the following features:
Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day's closing price.
Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.
Securities Covered by Price Test Restriction: The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.
Implementation: The rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.
Commissioner Luis Aguilar added the following commentary at the SEC Open Meeting held today:
"If every short sale were harmful, or every short sale benign, our task would be straightforward. There is a tension in regulating short sales. Efforts to reduce the potential for short sales to facilitate dangerous declines in securities prices, market manipulation, and diminished market confidence can conflict with efforts to permit short sales for hedging, improved liquidity, and price discovery. I believe that the rule before us today strikes a workable balance."
A copy of the SEC press release announcing adoption of the rule can be found here. Commissioner Aguilar's comments at the Open Meeting can be found here.
Wednesday, February 24, 2010
Friday, February 19, 2010
CFTC TAKING COMMENTS FOR COMPREHENSIVE REGULATORY OVERHAUL OF RETAIL FOREX TRANSACTIONS
In an attempt to fight fraud, the Commodity Futures Trading Commission (“CFTC”) issued a proposal that would give the CFTC tighter control over off-exchange foreign currency transactions made with retail members. The proposal is open for comment until March 22, 2010.
Traditionally, the CFTC has regulated commodity futures and options markets. However, as these markets have expanded out of agricultural goods into an array of highly complex financial futures contracts, the CFTC has extended its regulations to control these complex transactions. Falling into this category, certain leveraged or margined contracts made in foreign currencies that are offered to and sold to retail customers, or so called FOREX transactions, are now regulated by the CFTC.
The proposed comprehensive regulatory agenda would implement more stringent requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards for transacting retail FOREX trades. More specifically, the proposed regulations would require persons acting as counterparties to a retail FOREX transaction to be registered as foreign exchange dealers (“RFED”) with the CFTC. Counterparties that are primarily engaged in the exchange traded futures business or are registered futures commission merchants (“RFCM”) would be exempt from this registration requirement. Any registering RFED or RFCM would be required to have a $20 million minimum net capital requirement. Also, these registrants would have to collect security depositions in a specified minimum amount in order to limit the leverage available to retail clients. Registrants would also be required to seek approval for an additional volume-based minimum capital threshold that would be calculated based upon the amount that registrant owed as a counterparty to a retail FOREX transaction.
More importantly, the proposed changes would extend the registrations requirement beyond the immediate counterparties to the intermediaries of the transaction. Accordingly, intermediate parties that introduced a retail FOREX transaction to an RFED or RFCM would have to register with the CFTC as an introducing broker, commodity trading advisor, commodity pool operator, or associated persons of the RFED and RFCM and comply with the appropriate set of existing rules. Additionally the proposal would require any introducing broker that introduced a retail FOREX transaction to an RFED or RFCM to be guaranteed by that introduced party.
Critics claim that these additional regulations will stifle the current retail FOREX market, while others claim the regulations will mean more money in fund managers’ pockets. However, most can agree that the regulations are a fraud fighting measure meant to instill more confidence in the marketplace.
Traditionally, the CFTC has regulated commodity futures and options markets. However, as these markets have expanded out of agricultural goods into an array of highly complex financial futures contracts, the CFTC has extended its regulations to control these complex transactions. Falling into this category, certain leveraged or margined contracts made in foreign currencies that are offered to and sold to retail customers, or so called FOREX transactions, are now regulated by the CFTC.
The proposed comprehensive regulatory agenda would implement more stringent requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards for transacting retail FOREX trades. More specifically, the proposed regulations would require persons acting as counterparties to a retail FOREX transaction to be registered as foreign exchange dealers (“RFED”) with the CFTC. Counterparties that are primarily engaged in the exchange traded futures business or are registered futures commission merchants (“RFCM”) would be exempt from this registration requirement. Any registering RFED or RFCM would be required to have a $20 million minimum net capital requirement. Also, these registrants would have to collect security depositions in a specified minimum amount in order to limit the leverage available to retail clients. Registrants would also be required to seek approval for an additional volume-based minimum capital threshold that would be calculated based upon the amount that registrant owed as a counterparty to a retail FOREX transaction.
More importantly, the proposed changes would extend the registrations requirement beyond the immediate counterparties to the intermediaries of the transaction. Accordingly, intermediate parties that introduced a retail FOREX transaction to an RFED or RFCM would have to register with the CFTC as an introducing broker, commodity trading advisor, commodity pool operator, or associated persons of the RFED and RFCM and comply with the appropriate set of existing rules. Additionally the proposal would require any introducing broker that introduced a retail FOREX transaction to an RFED or RFCM to be guaranteed by that introduced party.
Critics claim that these additional regulations will stifle the current retail FOREX market, while others claim the regulations will mean more money in fund managers’ pockets. However, most can agree that the regulations are a fraud fighting measure meant to instill more confidence in the marketplace.
Friday, February 12, 2010
2ND CIRCUIT GRANTS EMERGENCY STAY OF FEDERAL JUDGE’S ORDER REQUIRING HEDGE-FUND MANAGER AND OTHERS TO GIVE THE SEC WIRETAP RECORDINGS
On February 10, 2010, the Wall Street Journal published an article discussing Federal District Judge Jed Rakoff’s recent order requiring hedge-fund manager and founder of Galleon Group, Raj Rajaratnam, and others being sued by the SEC to provide wiretap recordings to the SEC by February 15, 2010 as part of pre-trial discovery in the matter of SEC v. Galleon Management, LP, Raj Rajaratnam, Rajiv Goel, Anil Kumar, Danielle Chiesi, Mark Kurland, Robert Moffat and New Castle LLC. In Galleon, criminal charges have been filed against 21 individuals, 9 of whom have pleaded guilty and 8 of whom are cooperating with the government against the remaining defendants.
The wiretap recordings sought by the SEC are in the possession of Mr. Rajaratnam and the other defendants because they received the recordings from the U.S. attorney’s office as part of pre-trial discovery in a separate criminal proceeding. Prosecutors in that case are asking that Mr. Rajartnam forfeit $45 million dollars in illegal profits or losses avoided by Galleon Group. In addition, Mr. Rajartnam faces a maximum of 185 years in prison if convicted.
Mr. Rajaratnam and the other defendants in Galleon initially argued that they could not turn over the wiretap records to the SEC because of privacy laws governing wiretaps. However, Judge Rakoff noted that the defendants were unable to “cite any statutory authority for this restriction.” Mr. Rajaratnam has appealed Judge Rakoff’s ruling and plans to argue that the evidence should be suppressed because it was illegally obtained.
Notably, on February 11, 2010, the U.S. Court of Appeals for the Second Circuit granted Mr. Rajaratnam an emergency stay to give the court time to consider Mr. Rajaratnam’s appeal of Judge Rakoff’s order. The emergency stay will temporarily stop the disclosure of the wiretap recordings to the SEC.
The trial in Galleon is currently set for August 2, 2010.
The wiretap recordings sought by the SEC are in the possession of Mr. Rajaratnam and the other defendants because they received the recordings from the U.S. attorney’s office as part of pre-trial discovery in a separate criminal proceeding. Prosecutors in that case are asking that Mr. Rajartnam forfeit $45 million dollars in illegal profits or losses avoided by Galleon Group. In addition, Mr. Rajartnam faces a maximum of 185 years in prison if convicted.
Mr. Rajaratnam and the other defendants in Galleon initially argued that they could not turn over the wiretap records to the SEC because of privacy laws governing wiretaps. However, Judge Rakoff noted that the defendants were unable to “cite any statutory authority for this restriction.” Mr. Rajaratnam has appealed Judge Rakoff’s ruling and plans to argue that the evidence should be suppressed because it was illegally obtained.
Notably, on February 11, 2010, the U.S. Court of Appeals for the Second Circuit granted Mr. Rajaratnam an emergency stay to give the court time to consider Mr. Rajaratnam’s appeal of Judge Rakoff’s order. The emergency stay will temporarily stop the disclosure of the wiretap recordings to the SEC.
The trial in Galleon is currently set for August 2, 2010.
Thursday, February 4, 2010
AARP, NASAA, CFA AND FUND DEMOCRACY ISSUE JOINT LETTER IN SUPPORT OF SENATE BILL
On February 2, 2010, the AARP, NASAA, CFA and Fund Democracy issued a joint letter to members of the Senate Committee on Banking, Housing and Urban Development in support of the Restoring American Financial Stability Act of 2009 (the Act). The letter expresses support of Section 913 of the Act, which ensures that brokers who offer investment advice are subject to the same standards as investment advisors by removing the broker-dealer exclusion from the Investment Advisers Act of 1940.
The authors of the letter express concern that Section 913 appears to be under attack by members of the broker-dealer and insurance industries whose sales practices would be subject to the new fiduciary duty standard and disclosure obligations imposed under the Investment Advisers Act. The letter does not approve of the broker-dealer community's proposed changes that would limit the fiduciary duty's scope by applying it to investment advice but not to the sales recommendations designed to implement that advice. The letter's authors are of the opinion that this would create the impression of investor protections where none exist.
The letter also expresses concern over the insurance industry's objections to Section 913. Under the fiduciary duty imposed by the legislation, insurance agents who sell variable annuities and other variable products would be required to make recommendations in the best interests of their clients and to disclose all material information regarding those recommendations, including information about costs, risks, and conflicts of interest. Concerns over abusive practices involved in the marketing and sales of annuities and more particularly variable annuities have led NASAA to issue numerous warnings about the products to investors and were similarly identified as a problem area in the joint SEC-FINRA-NASAA Investor Alert on schemes to defraud senior investors.
The authors of the letter are of the opinion that holding insurance agents and brokers to a fiduciary duty when they provide investment advice in association with the sale of variable annuities would provide additional investor protection tools. Most notably, it would no longer be sufficient to show that a variable annuity was generally suitable for the customer; they would have to determine that, among the investments they have available to sell, the variable annuity was the option best suited to the customer. While certain segments of the insurance lobby have also opposed the pro-investor provisions of Section 913 on the grounds that the legislation would require these firms to register and be regulated as investment advisers, the authors note that the requirements for such registration are quite modest. They note that registration can be accomplished by filing a form electronically with either the SEC or appropriate state regulators and annual state registration fees average only $210 per firm and $60 per individual.
A complete copy of the letter sent to the members of the Senate Committee on Banking, Housing and Urban Development can be found here.
The authors of the letter express concern that Section 913 appears to be under attack by members of the broker-dealer and insurance industries whose sales practices would be subject to the new fiduciary duty standard and disclosure obligations imposed under the Investment Advisers Act. The letter does not approve of the broker-dealer community's proposed changes that would limit the fiduciary duty's scope by applying it to investment advice but not to the sales recommendations designed to implement that advice. The letter's authors are of the opinion that this would create the impression of investor protections where none exist.
The letter also expresses concern over the insurance industry's objections to Section 913. Under the fiduciary duty imposed by the legislation, insurance agents who sell variable annuities and other variable products would be required to make recommendations in the best interests of their clients and to disclose all material information regarding those recommendations, including information about costs, risks, and conflicts of interest. Concerns over abusive practices involved in the marketing and sales of annuities and more particularly variable annuities have led NASAA to issue numerous warnings about the products to investors and were similarly identified as a problem area in the joint SEC-FINRA-NASAA Investor Alert on schemes to defraud senior investors.
The authors of the letter are of the opinion that holding insurance agents and brokers to a fiduciary duty when they provide investment advice in association with the sale of variable annuities would provide additional investor protection tools. Most notably, it would no longer be sufficient to show that a variable annuity was generally suitable for the customer; they would have to determine that, among the investments they have available to sell, the variable annuity was the option best suited to the customer. While certain segments of the insurance lobby have also opposed the pro-investor provisions of Section 913 on the grounds that the legislation would require these firms to register and be regulated as investment advisers, the authors note that the requirements for such registration are quite modest. They note that registration can be accomplished by filing a form electronically with either the SEC or appropriate state regulators and annual state registration fees average only $210 per firm and $60 per individual.
A complete copy of the letter sent to the members of the Senate Committee on Banking, Housing and Urban Development can be found here.
THE SEC ADOPTS NEW RULES TO STRENGTHEN MONEY MARKET FUNDS
On January 27, 2010, the SEC adopted revisions to its regulatory requirements for money market funds. The revisions include increasing credit quality, improving liquidity, shortening maturity limits and requiring the disclosure of a fund’s actual “mark-to-market” net asset value (“NAV”) on a delayed basis.
The ultimate purpose of the new rules is threefold: (1) to help reduce risks associated with money market funds so that investor assets are better protected and money market funds can better withstand market crises; (2) to create a substantial new disclosure regime so that both investors and the SEC can better monitor a money market fund’s investments and risk characteristics; and (3) to make money market funds less vulnerable to “runs.”
The SEC hopes the new rules will have substantial benefits for investors. As Chairman Mary Schapiro noted, the SEC’s recent revisions will help ensure that “money market fund investors…have a better sense of the holdings, value and risk profile of their money market funds.”
Chairman Schapiro also indicated that SEC’s adoption of new regulatory requirements for money market funds is only the first step in the SEC’s reformation of the money market fund industry. The SEC is also actively considering more fundamental changes to the structure of money market funds, including:
• A floating NAV, rather than the stable $1.00 NAV prevalent today;
• Mandatory redemptions-in-kind for large redemptions (such as by institutional investors);
• “Real-time” disclosure of shadow NAV;
• A private liquidity facility to provide liquidity to money market funds in times of stress;
• A possible “two-tiered” system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements; and
• Several other options being discussed with the President’s Working Group.
We will keep you apprised of any further changes by the SEC to the money market fund industry in the coming months.
The ultimate purpose of the new rules is threefold: (1) to help reduce risks associated with money market funds so that investor assets are better protected and money market funds can better withstand market crises; (2) to create a substantial new disclosure regime so that both investors and the SEC can better monitor a money market fund’s investments and risk characteristics; and (3) to make money market funds less vulnerable to “runs.”
The SEC hopes the new rules will have substantial benefits for investors. As Chairman Mary Schapiro noted, the SEC’s recent revisions will help ensure that “money market fund investors…have a better sense of the holdings, value and risk profile of their money market funds.”
Chairman Schapiro also indicated that SEC’s adoption of new regulatory requirements for money market funds is only the first step in the SEC’s reformation of the money market fund industry. The SEC is also actively considering more fundamental changes to the structure of money market funds, including:
• A floating NAV, rather than the stable $1.00 NAV prevalent today;
• Mandatory redemptions-in-kind for large redemptions (such as by institutional investors);
• “Real-time” disclosure of shadow NAV;
• A private liquidity facility to provide liquidity to money market funds in times of stress;
• A possible “two-tiered” system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements; and
• Several other options being discussed with the President’s Working Group.
We will keep you apprised of any further changes by the SEC to the money market fund industry in the coming months.
Friday, January 29, 2010
THE FATE OF THE “HONEST-SERVICES FRAUD” WILL BE DECIDED THIS YEAR
The U.S. Supreme Court is slated to decide this year whether 18 U.S.C.A. § 1346, the honest-services fraud law, is being applied too broadly, rendering it unconstitutional. On December 8, 2009, the Court heard arguments in the cases of former Alaska state legislature, Bruce Weyhrauch, and former Hollinger International CEO, Conrad Black. On March 1, 2010, the Court will hear arguments on former Enron CEO, Jeff Skilling. Decisions on these cases, where each defendant was charged with honest-services fraud, are expected this summer.
The use of honest-services fraud can be traced back to 1949. However, it was not until the 1970s that this legal theory became an outright success. Essentially, this concept extends the traditional theory of fraud beyond the classic Madoff-type cases to cases where deceit was used to deprive the public of honest services. Under this theory, deprivation of honest services is considered to be a theft of intangible rights that falls under the “scheme to defraud” prong of the federal mail and wire fraud laws.
The honest-services fraud theory became extraordinarily useful for federal prosecutors put in the position of prosecuting corrupt state officials because often, federal bribery laws did not apply or it was challenging to prove bribery beyond a reasonable doubt. Honest-services fraud, on the other hand, could be proven more easily because secret payments to a state official cheated the public of the official’s honest services, which is sufficient to prove honest-services fraud. The use of honest-services fraud became so popular in the mid-1980s that the Chief of the business crimes unit at the U.S. Attorney’s office, now U.S. District Judge, Jed Rakoff, wrote that the theory was “our Colt .45, our Louisville Slugger.”
Part of the success of honest-services fraud is due to the fact that it proves most useful in cases where criminality is most unclear. Primarily, honest-services fraud is most suitable in self-dealing cases, wherein a corporate officer directs corporate business to a company in which the officer has an undisclosed private interest, or where an official leans on regulators for the same type of favorable private result. Most recently, it has been used in the high-profile cases of former Illinois Governor, Rod Blagojevich; former U.S. congressman of Louisiana, William Jefferson; and lobbyist Jack Abramoff.
This year will not be the first grapple the Supreme Court has faced with honest-services fraud. In 1987, the Court heard McNally v. U.S. Despite every appellate court endorsing the concept of honest-services fraud, the Supreme Court, by a 7-2 vote, rejected the concept, stating: “we read § 1341 [the mail and wire fraud statute] as limited in scope to the protection of property rights.” The Court was primarily concerned with the vagueness, federalism, and separation-of-powers issues inherent in the unstructured principle. In response, in October 1988, Congress passed the law now at issue (§ 1346), but resolved none of the Court’s constitutional concerns.
Once the law was passed, appellate courts resurrected their pre-McNally precedents and continued to determine limitations on an ad hoc basis. Some federal courts require a defendant to have “contemplated economic harm” to victims; others require that the defendant have violated a state law; and yet there are some federal courts that don’t require state violations. But there must always be some set of factors present. This non-uniform application of § 1346 is precisely what the Supreme Court has set out to analyze and review.
Critics of § 1346 are on both ends of the spectrum, objecting to its constitutionality because of violations of due process or federalism. The due process argument is based on the statute not providing fair notice to businessmen and state officials about what is and is not a crime before inadvertently committing one. Meanwhile, the federalism argument relies on the issue that the Constitution does not give the federal government direct power to punish fraud, and the honest-services fraud beefs-up the federal mail fraud law to such an extent that it violates the language of the Constitution and directly infringes on states’ rights to regulate fraud.
Preliminary discussions in the Supreme Court have not yielded a definitive consensus either way. However, no matter which way the Court rules, the significance of this decision cannot be understated, especially for counsel in the pending cases of Weyhrauch, Black, and Skilling.
The use of honest-services fraud can be traced back to 1949. However, it was not until the 1970s that this legal theory became an outright success. Essentially, this concept extends the traditional theory of fraud beyond the classic Madoff-type cases to cases where deceit was used to deprive the public of honest services. Under this theory, deprivation of honest services is considered to be a theft of intangible rights that falls under the “scheme to defraud” prong of the federal mail and wire fraud laws.
The honest-services fraud theory became extraordinarily useful for federal prosecutors put in the position of prosecuting corrupt state officials because often, federal bribery laws did not apply or it was challenging to prove bribery beyond a reasonable doubt. Honest-services fraud, on the other hand, could be proven more easily because secret payments to a state official cheated the public of the official’s honest services, which is sufficient to prove honest-services fraud. The use of honest-services fraud became so popular in the mid-1980s that the Chief of the business crimes unit at the U.S. Attorney’s office, now U.S. District Judge, Jed Rakoff, wrote that the theory was “our Colt .45, our Louisville Slugger.”
Part of the success of honest-services fraud is due to the fact that it proves most useful in cases where criminality is most unclear. Primarily, honest-services fraud is most suitable in self-dealing cases, wherein a corporate officer directs corporate business to a company in which the officer has an undisclosed private interest, or where an official leans on regulators for the same type of favorable private result. Most recently, it has been used in the high-profile cases of former Illinois Governor, Rod Blagojevich; former U.S. congressman of Louisiana, William Jefferson; and lobbyist Jack Abramoff.
This year will not be the first grapple the Supreme Court has faced with honest-services fraud. In 1987, the Court heard McNally v. U.S. Despite every appellate court endorsing the concept of honest-services fraud, the Supreme Court, by a 7-2 vote, rejected the concept, stating: “we read § 1341 [the mail and wire fraud statute] as limited in scope to the protection of property rights.” The Court was primarily concerned with the vagueness, federalism, and separation-of-powers issues inherent in the unstructured principle. In response, in October 1988, Congress passed the law now at issue (§ 1346), but resolved none of the Court’s constitutional concerns.
Once the law was passed, appellate courts resurrected their pre-McNally precedents and continued to determine limitations on an ad hoc basis. Some federal courts require a defendant to have “contemplated economic harm” to victims; others require that the defendant have violated a state law; and yet there are some federal courts that don’t require state violations. But there must always be some set of factors present. This non-uniform application of § 1346 is precisely what the Supreme Court has set out to analyze and review.
Critics of § 1346 are on both ends of the spectrum, objecting to its constitutionality because of violations of due process or federalism. The due process argument is based on the statute not providing fair notice to businessmen and state officials about what is and is not a crime before inadvertently committing one. Meanwhile, the federalism argument relies on the issue that the Constitution does not give the federal government direct power to punish fraud, and the honest-services fraud beefs-up the federal mail fraud law to such an extent that it violates the language of the Constitution and directly infringes on states’ rights to regulate fraud.
Preliminary discussions in the Supreme Court have not yielded a definitive consensus either way. However, no matter which way the Court rules, the significance of this decision cannot be understated, especially for counsel in the pending cases of Weyhrauch, Black, and Skilling.
Thursday, January 28, 2010
FINRA ISSUES GUIDANCE ON BLOGS AND SOCIAL NETWORKING WEBSITES
Americans are increasingly using social media websites such as blogs, Linkedin, Facebook, and Twitter. As a result, FINRA has published guidance to member firms seeking to know how the FINRA rules governing communications with the public apply to these social media sites. Back in September 2009, FINRA organized a Social Networking Task Force composed of FINRA staff and industry representatives to discuss how firms and their registered representatives could use social media sites for legitimate business purposes in a manner that ensures investor protection. Regulatory Notice 10-06 was issued as a product of the input from this Task Force in order to guide firms on applying the communications rules to social media sites.
FINRA's stated goal in issuing the Notice is to ensure that investors are protected from false or misleading claims and representations. This way, firms are able to effective and appropriately supervise their associated persons' participation in these sites, while at the same time allowing firms to take advantage of new technology. The Notice does not address the use of social media by individuals solely for personal reasons.
Some of the issues addressed in the Notice are discussed below.
Suitability Responsibilities: If a firm or its personnel recommends a security through a social media site, the broker-dealer must determine that the recommendation is suitable for every investor to whom it is made through that social media site. Whether a particular communication constitutes a "recommendation" for purposes of Rule 2310 will depend on the facts and circumstances of the communication. Moreover, these communications must often include additional disclosure in order to provide the customer with a sound basis for evaluating the facts with respect to the product.
Blogs: Rule 2210 defines "public appearance" to include unscripted participation in an interactive electronic forum such as a chat room or online seminar, and does not require firms to have a registered principal approve in advance the extemporaneous remarks of personnel who participate in public appearances. If a blog is used to engage in real-time interactive communications, FINRA would consider the blog to be an interactive electronic forum that does not require prior principal approval. FINRA considers static postings on blogs to constitute "advertisements" under Rule 2210 such that if a firm or its registered representative sponsors such a blog, it must obtain prior approval of any such posting.
Social Networking Sites: Websites such as Facebook, Twitter, and Linkedin contain both static and interactive content. Static content, such as profile or wall information, must be approved by a registered principal of the firm prior to its posting. The portion of a social networking site that provides for interactive communications constitutes an interactive electronic forum, and firms are not required to have a registered principal approve these communications prior to use.
FINRA noted that every firm should consider the guidance provided by the Notice in the context of its own business and its compliance and supervisory programs. A complete copy of Notice 10-06 can be found here.
FINRA's stated goal in issuing the Notice is to ensure that investors are protected from false or misleading claims and representations. This way, firms are able to effective and appropriately supervise their associated persons' participation in these sites, while at the same time allowing firms to take advantage of new technology. The Notice does not address the use of social media by individuals solely for personal reasons.
Some of the issues addressed in the Notice are discussed below.
Suitability Responsibilities: If a firm or its personnel recommends a security through a social media site, the broker-dealer must determine that the recommendation is suitable for every investor to whom it is made through that social media site. Whether a particular communication constitutes a "recommendation" for purposes of Rule 2310 will depend on the facts and circumstances of the communication. Moreover, these communications must often include additional disclosure in order to provide the customer with a sound basis for evaluating the facts with respect to the product.
Blogs: Rule 2210 defines "public appearance" to include unscripted participation in an interactive electronic forum such as a chat room or online seminar, and does not require firms to have a registered principal approve in advance the extemporaneous remarks of personnel who participate in public appearances. If a blog is used to engage in real-time interactive communications, FINRA would consider the blog to be an interactive electronic forum that does not require prior principal approval. FINRA considers static postings on blogs to constitute "advertisements" under Rule 2210 such that if a firm or its registered representative sponsors such a blog, it must obtain prior approval of any such posting.
Social Networking Sites: Websites such as Facebook, Twitter, and Linkedin contain both static and interactive content. Static content, such as profile or wall information, must be approved by a registered principal of the firm prior to its posting. The portion of a social networking site that provides for interactive communications constitutes an interactive electronic forum, and firms are not required to have a registered principal approve these communications prior to use.
FINRA noted that every firm should consider the guidance provided by the Notice in the context of its own business and its compliance and supervisory programs. A complete copy of Notice 10-06 can be found here.
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