ON THE MONITOR
The Regulatory Bind of Social Networking
February 1, 2010
Under new guidelines from the Financial Industry Regulatory Authority on the use of social networks, securities firms must keep copies of all business-related communications on social networks, whether those communications are official or from “associated persons.”
But the securities industry’s largest self-regulating body also admits that the technology to grab those messages might not exist.
Every Wall Street company – except possibly the smallest ones – have employees using social networks, creating potential liability problems for their employers, for whom they might not be speaking. However, many firms are also actively using these new platforms themselves, to reach out to customers, the general public, and potential new recruits. There are steps that companies can take to control these communications, but there's no perfect solution.
EVERYBODY'S DOING IT
More than 1,300 financial services companies around the world have employees using social networks like Facebook, LinkedIn and Twitter, according to Kailash Ambwani, CEO of FaceTime, a social networking monitoring firm. Social network connections lead to more sales than normal leads, he said, and are also useful for recruiting new employees. FaceTime is used widely in the financial services industry for monitoring instant messages, social networks, and other communication channels. Each of the world's top 15 investment banks use FaceTime, Ambwani says.
But financial firms can’t necessarily control what goes on on Facebook. For instance, there is already a Facebook page for Fidelity Investments that has nothing to do, officially, with Fidelity. The page claims to be for current and former Fidelity employees, where more than 1,000 members network, discuss job opportunities, talk about working conditions – even promote insurance products and ask for investment advice.
But “that page is not affiliated with Fidelity,” according to Fidelity Investments vice president of media relations Adam Banker.
However, the page is branded with the Fidelity logo, and contains posts from people claiming to be current Fidelity employees.
Despite that unofficial status, people who identify themselves as Fidelity employees may be posting business-related information, such as job openings or – potentially – investment advice. In fact, there are more than 50 Facebook groups that mention Fidelity Investments, including several groups in which former employees, vent, reconnect with former colleagues, and plan reunions. Another group is for Fidelity's Leap Technology Program, a six-month technology training program for new college graduates, where group members used the Facebook page to plan social outings. Another group is for participants in the 2009 Fidelity Investments charity event MS 150 Bike Ride, which includes photos from the June event in Rhode Island.
Many groups have the official Fidelity corporate logo. “It could definitely create confusion for the public,” said Michael Osterman, an analyst with messaging consultancy Osterman Research Inc. “ Fidelity would be considered responsible for dealing with these issues, although someone misappropriating a trademark or copyrighted work is also culpable.”
Companies can send cease-and-desist letters to social networks or individuals running unsanctioned sites. Twitter, for example, takes down the account or changes the user names of persons pretending to be people who they're not, he said. And its terms of service specifically state, “we reserve the right at all times (but will not have an obligation) to remove or refuse to distribute any content on the Services and to terminate users or reclaim usernames.”
Social network groups discuss networking opportunities, job postings, working conditions in particular locations – and that's just on the public pages. It's impossible to tell how much private chatter takes place between group members.
And it's not just FaceBook. LinkedIn lists hundreds of people who say they are currently employed at Fidelity Investments. LinkedIn even shows testimonials from satisfied clients – a potential liability for registered investment advisors, said Osterman, since this kind of display is prohibited by SEC Rule 206(4), which prohibits registered advisers from including testimonials in advertising. LinkedIn also shows who was recently hired or promoted, and who's looking for new job opportunities.
A SOCIAL PRESENCE
Consider, for example, the Fidelity Investments case. Fidelity is the country's largest mutual fund company with 492 funds and $1.29 trillion under management (as of Dec. 2009). The company has an active Twitter page, using this platform to point its 1,300 followers to new articles on Fidelity's website and to answer questions from the public. And the company take steps to make sure that the communications are in compliance, said Fidelity’s Banker.
Twitter complements the company's online presence, he said. Where a Web site can give customers deep information on investments or new offers, Twitter delivers quick updates in 140-character bursts, and allows the company to have an open conversation with the public.
“Twitter also offers Fidelity an opportunity to expand its online relationship with investors and also provides investors a new communications channel through which they can share information with us and others,” he said. “We expect to have a presence on Facebook as well, in the future.”
Vanguard, which which operates 160 mutual funds and has $1.24 trillion under management (as of August 2009), has an official Facebook page, for instance. It uses that “page” almost as a Web site, within Facebook, to educate customers about investment topics, to promote contests and events like the “Digging for Simple Truths” content which encouraged the public to find “tokens” on Vanguard's Website in return for prizes, and to raise money for charities such as the company's annual United Way campaign.
PIMCO, which operates more than 130 funds and has $1 trillion under management, uses its Facebook page to showcase blog posts by company executives on such topics as emerging markets interest rates predictions and rising unemployment rates.
Both companies allow visitors to post comments on their Facebook pages – and include disclaimers about this type of content.
“We reserve the right to remove any post at any time for any reason, but if we don't remove a post that doesn't mean PIMCO endorses its content or view,” PIMCO says in a disclaimer on the page.
MANAGEMENT TOOLS
Companies looking to manage the use of social networks have a broad range of options, from creating and enforcing policies about employee use of the networks, to putting access blocks on corporate computers, to allowing some use and installing monitoring software to track it.
“With the older, more conservative organizations, the usual approach is just to block it,” aid Irwin Lazar, an analyst at The Nemertes Research Group Inc. But simple blocks usually don't work, because employees now have many ways – and devices -- to access accessing social networking sites – even during business hours.
“When we see companies trying to block social networks, their employees have iPhones with personal accounts, or a laptop with WiFi that they use in the office,” said Lazar.
Companies need to create policies that spell out how employees should use social networks, and educate their employees about these policies, according to Lazar. Then, he says, they need to use monitoring tools such as Facetime's to make sure that the policies are followed. Companies can also monitor social network use by checking postings on public pages, to make sure that employees don't give inappropriate investment advice or otherwise put the company in a bad light.
“We see some companies that just put out a set of guidelines and trust their users to make intelligent decisions,” Lazar said. “On the other extreme, we see companies asking employees for account info [such as logins and passwords]. You could potentially see companies -- especially those in the financial services -- ask for your LinkedIn information and if you created a private page and didn't tell the company about it, it could be grounds for dismissal.”
Companies also need to be proactive about pages set up under company names, he added. One way to get ahead is for companies to set up their own networking groups for employees. This would enable them to monitor and manage these communications, and enable them to control access to the pages only to current employees.
It's not just communicating of investment advice over tweets or within Facebook pages that companies need to worry about, Lazar said. Companies may also be held liable for workplace harassment or discrimination suits based on communications between staff that take place on social networks, especially if the communications took place on company time.
It's a replay of what started to occur in 2001 with the spread of instant messaging on personal computers, said Eric Young, FaceTime's director of field services.
FaceTime has expanded its instant messaging tools, which let company managers watch the flow of messages that occur over such services as AOL Instant Messenger and MSN Messenger about their companies to include social networks like Facebook, Young said. These include mapping employees to their Facebook user names, and to monitor all communications with the service that go through the corporate network. Employees who work remotely can be monitored if they use the company's virtual private network. FaceTime can even monitor communications that go through mobile devices such as Blackberries, as long as the employer supplied the device and is able to store a piece of software on it that allows, in effect, digital eavesdropping.
However, technology can't do much to monitor communications happening on personal computers or smart phones purchased and maintained by employees on their own and at their own expense.
“If it's a completely personal device, there are issues,” Young admitted.
Today's employees have an ever-expanding world of social networks, and channels to access these networks.
Howard Lindzon, CEO of StockTwits and a partner at private equity fund Knight's Bridge Capital Partners calls social networking “a billion-headed monster.”
“I don't know what you can do,” he said. “It's so open right now.”
Lindzon himself uses Twitter, and also has Facebook and LinkedIn pages.
The only thing that companies can really do, he said, is to set policies for their employees describing appropriate use of social networks.
At StockTwits, for example, the company has a FaceBook page, and employees use Twitter. “So far, at least, people are behaving themselves for the most part,” he said.
HE SAID, SHE SAID
The problems with uncontrolled messages from good or bad intentions of employees aren't unique to social networks, Osterman says. Sensitive communications may happen on any number of platforms – telephone calls, email messages over private accounts, even neighbors chatting across a fence.
And the employer can’t easily watch what’s going on, in sites or communications that employers conduct in private. If employers attempt to get access to private accounts, “it gets into a real Pandora's box,” Osterman says. “You're going to be balancing the free speech rights of individuals versus the right of the employer to protect their name from being dragged through the mud.”
Nonetheless, it will become more common for employers to monitor private communication channels with tools like Facetime's for inappropriate communications by employees, especially when they mention or relate to the employer or their line of business.
“If you have a personal Twitter account, and you're a registered representative selling securities, in a sense you are borrowing on the integrity [of your employer] and their name to get followers or get your advice viewed more favorably,” Osterman said.
In that case, an investment firm can – and should, according to Osterman and, indirectly, by the FINRA guidelines – require employees to notify supervisors of any Twitter, Facebook or other social network or service where they discuss securities or investments in any fashion. Beyond that, he says, the policies should allow their employers to not just follow their employees, but keep copies of what gets said.
THE WEEK AHEAD:
TUESDAY, FEBRUARY 2
EARNINGS CALL: Gladstone Capital (GLAD)
8:30 a.m., Estimate: 22 cents
HEARING: Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies
2:30 p.m., Senate Banking Committee, 538 Dirksen Senate Office Building
WEDNESDAY, FEBRUARY 3
EARNINGS CALL: Investment Technology Group (ITG)
11 a.m., Estimate: 35 cents
THURSDAY, FEBRUARY 4
HEARING: Implications of the ‘Volcker Rules’ for Financial Stability
10 a.m., Senate Banking Committee, 538 Dirksen Senate Office Building
FRIDAY, FEBRUARY 5
EVENT: 16TH Annual Private Equity and Venture Capital Conference
8 a.m., Wharton School, University of Pennsyvlania, Hyatt at the Bellevue
SPEECH: Robert S. Khuzami, Director, Division of Enforcement, et al., SEC
9 a.m., “SEC Speaks in 2010,’’ Practising Law Institute, Ronald Reagan Bldg. & International Trade Center, 1300 Pennsylvania Avenue, N.W, Washington D.C.
THE WEEK THAT WAS:
SEC to CEOs: Disclose Climate Risks
U.K. Scraps Amendment on Short-Selling
General Atlantic Buys Stake in Markit
New Device Switches Traffic In Less Than 100 Billionths of a Second
FINRA Issues Social Networking Guidance
BlackRock Hires Ex-Goldman Sachs Banker Wilson
Goldman Tops JPMorgan as Best Broker as Speed Shakes Up Trading
NYSE operational after Thursday quote, trade delays
CME Insists It Doesn't Have to Accept Rival's Trades; Its Stock Falls
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