Monday, March 18, 2013

Regulators to Financial Service: Stop Fearing and Start Embracing Social Media!

Financial service firms are a conservative lot, filled with risk, compliance and legal professionals who are ever vigilant detecting, preventing and mitigating risk. Generally, that is a good thing, since no one wins when your bank, insurance company or investment firm takes unnecessary risks.

Actual photo of FinServ executive
considering social media regulation.
But at times, in periods when technology, consumer behavior and customer expectations are rapidly evolving and regulation seems less certain, this natural conservatism can get in the way of good decisions. When this happens, opportunities to enhance and protect the interests of both the business and customers can be lost.

Now is one of those periods, but change is imminent. Even Federal regulators, in their own subtle and maddeningly vague manner, are telling FinServ firms it is time to stop fearing and start embracing social media. Two recent publications from the FFIEC and SEC demonstrate regulators are looking for financial institutions to be more assertive in realizing social media benefits and independently managing social media risk.

Waiting for perfect guidance from regulators is never the road to success, since perfect guidance is never furnished; consultants and law firms make rich livings in the gap between regulatory guidance and certainty. Moreover, as financial institutions wait for better guidance from regulators, it can leave the industry in general and certain companies in particular lagging far behind more innovative competition, not to mention the level of service and responsiveness consumers have come to expect. With a careful reading of the two new reports from Federal regulators, it seems they, too, are concerned that an overly cautious approach is harming the industry.

Social Media Risks: Present but Manageable

Social media poses new risks for FinServ firms, and there are good reasons for firms to proceed with caution; however, there are no good reasons for the level of anxiety and sluggishness seen at many firms. Many Financial service companies can proceed with a great deal more alacrity for several reasons:

  • Substantial guidance has already been furnished by regulators, including FINRA (Financial Industry Regulatory Authority), SEC (Securities and Exchange Commission) and the FFIEC (Federal Financial Institutions Examination Council). At the state level there is a patchwork of regulators across 50 states, but thus far organizations such as the NAIC (National Association of Insurance Commissioners) and state regulators have taken a very similar tact to Federal regulators; the association's December 2011 social media white paper for state regulators was not terribly different than the guidance coming at the Federal level. While there are gray areas (such as whether a LinkedIn recommendation is really a forbidden testimonial), many actions by firms and licensed professionals are clearly within the safe zone, provided reasonable precautions are taken. For more information, check out the excellent guide to FINRA regulations in social media from Actiance.
  • No firm or person has yet been been cited by a regulator for actions in social media, unless those same actions would have been cited in any other medium. Regulators' enforcement has been sane, reasonable and understandable. Do not do anything in social media that you should not do in email, print, in person or on the web, and you will find it difficult to run afoul of the regulators.
  • For years, tools such as Hearsay, Socialware and Actiance have been available to help firms mitigate and manage social media risk. These platforms are not complete solutions--firms still need to take additional actions such as educating financial professionals, monitoring social media for violations and archiving to the requirements set by Rule 17a-4--but existing social media management platforms help mitigate much of the risk.
  • The risks to firms from actions of registered representatives (RRs) can be limited with reasonable precautions. An excellent post on the Hearsay Social blog cites an instance when the Department of Justice declined to take action against a firm because it had adequate measures in place that were circumvented by an RR in the course of violating the rules. That case did not involve a social media issue, but Hearsay states, "as long as firms have a clear and concise social media policy with a governance structure that identifies roles and responsibilities and incorporates controls for the use and monitoring of social media, an employee training program, and appropriate oversight and monitoring of social media use, they should not have liability for an individual RR’s violation." 
In 2013, there are new signs regulators are not just open to but are actively encouraging financial institutions to adopt a more assertive stance in social media with respect to both exploiting benefits and managing risks. In two recent publications, the FFIEC and SEC tell the industry it cannot ignore social media and must apply good judgment to its social media interactions and processes. Of course, neither government body says that in such clear language, but you do not need to dig too deeply to see that financial regulators do not want to overburden FinServ companies (or themselves) with needless and detrimental social media regulation.

Social Business Referenced in FFIEC Proposed Social Media Guidelines 

In January, the FFIEC issued proposed guidelines on social media. The FFIEC is an interagency body that encompasses the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB). Also of note is that the FFIEC, upon finalizing this guidance, will urge state regulators to adopt the same rules.

It is not difficult to sense that the FFIEC sees social media changing not just marketing and communications but financial products and services. The document addresses and references the advanced use of social media and social business by FinServ firms several times:

  • "Financial institutions may use social media in a variety of ways, including marketing, providing incentives, facilitating applications for new accounts, inviting feedback from the public, and engaging with existing and potential customers, for example, by receiving and responding to complaints, or providing loan pricing." Note the inclusion of forward-thinking social strategies, such as providing incentives and facilitating applications within social media; this gives a hint at how the FFIEC views social impacting business, not just being used for service and communications.
  • Some firms may choose to "use(s) social media to engage in lending, deposit services, or payment activities" and "Social media may be used to market products and originate new accounts."
  • Social media can be used to "to facilitate a consumer’s use of payment systems" and "under existing law, no additional disclosure requirements apply simply because social media is involved."
  • Not only are financial firms not discouraged from prospecting in social media, the FFIEC provides reasonable guidance for doing so, stating that "a financial institution that relies heavily on social media to attract and acquire new customers should have a more detailed program than one using social media only to a very limited extent."
  • Generally, regulators concern themselves with risks and regulation rather than promoting the advantages of new technologies, but the FFIEC makes a point of addressing that social media "has the potential to improve market efficiency" and can "help users and providers find each other and match products and services to users’ needs."
At a time when many FinServ firms are afraid even to mention products in social networks, federal agencies are suggesting financial institutions might use social media for applications, lending, deposits, payments and matching products to customer needs. This should be a huge wake up call to FinServ executives.

The document observes there are risks in social media, but it takes pain to pin those risks not to actions in social media but the potential failure of firms to monitor and manage those actions. The FFIEC expects people to make mistakes and, at times, use poor judgment, but the responsibility falls to firms to protect themselves and their registered representatives: "Increased risk can arise from a variety of directions, including poor due diligence, oversight, or control on the part of the financial institution."

The FFIEC also tells FinServ firms that there is no way for them to avoid addressing social media, regardless of what they opt to do in the channel. "A financial institution that has chosen not to use social media should still be prepared to address the potential for negative comments or complaints that may arise within the many social media platforms... and provide guidance for employee use of social media." The report also notes that inaction on the part of some firms is increasing risks because institutions' "policies and procedures governing certain products or activities may not have kept pace with changes in the marketplace."

When a group of federal agencies begins to outline new business opportunities furnished by digital and social technologies and suggests companies are accepting risk by failing to keep up with the changes in our world, you do not need to read between the lines to get the message. The FFIEC is not suggesting recklessness, but it is clear they do not want firms failing to exploit new opportunities out of fear of regulation.

Greater FinServ Independence and Judgement Advised in SEC Social Media Guidance Update

In a new "Guidance Update" published by the SEC last Friday, the agency cries "Uncle" with the flood of social media content that firms are filing with FINRA. It cites "an abundance of caution" that is causing "many mutual funds and other investment companies (to) file materials on their social media sites with FINRA unnecessarily." (That's regulator-speak for "Stop being a bunch of wusses!")

The report is an acknowledgment that the SEC must furnish more specific guidance, but it also is evident the SEC believes firms must begin to apply better judgment in social media and be more assertive in managing risks rather than deferring them to regulators. The SEC's Update gives a level of specificity far beyond anything furnished by other regulators to date, even going so far as to provide actual tweets and posts that "would not trigger a filing requirement." The guidance suggests that the following social media posts are safe and do need to be filed with the agency:

  • An incidental mention of an investment company or family of funds that is not related to a discussion of the investment merits. What is notable is that you can market your financial products in social media, provided you do not mention the investment merits. For example, the SEC suggests this is an acceptable tweet that need not be filed:  “Consumer Reports has written an article in which it mentions our Brand X Rewards Card. Are you a card member?"
  • The incidental use of the word “performance” in connection with a discussion of an investment company or family of funds, without specific mention of a fund’s return. The word "performance" is not forbidden in social media, provided you do not promote a fund's return. For example, "Click on this link (website url) where we provide full details of our yearly performance since inception.”
  • A statement unrelated to a discussion of the investment merits of a fund that includes a hyperlink to general financial and investment information or commentaries on economic, political or market conditions. The SEC notes you can tweet things like "Here’s a Q&A with our Portfolio Manager, John Doe, regarding his views on the economy for 2013. (website url)"  or "Gold and silver have provided a relatively low correlation to stocks and bonds over the last few years. (website url)."
  • A response to an inquiry by a social media user that provides factual information not related to a discussion of the investment merits of the fund. Firms need not fear direct and detailed responses in their social media replies, provided they do not discuss investment performance. For example, if a consumer asks, "What was the NAV for ABC fund on Friday?," the SEC says firms may reply "$xx.xx." Another example furnished by the SEC notes that you can address the reasons investments are included within a fund; for instance, if a consumer posts "Why are your funds such a large investor in ABC Manufacturer’s stock?" it is acceptable to respond, "As you know, ABC Manufacturer is found in many broad-market indices that our index funds are obligated to track so some of our index funds hold those shares as a result."
Did you detect the recurring theme in that guidance?  "Not related to a discussion of the investment merits or return" is repeated in one form or another time and again. The SEC is clear in telling financial service firms they can talk about their products, provide links to their products and share general market commentary without needing to file this content with FINRA--just don't tweet returns and investment merits. Firms have been proceeding too cautiously and over-filing, which means the are not using social media to the extent the SEC believes is possible and good for the industry.

How Financial Service Firms Can Sensibly Embrace Social Media

There are many practical steps FinServ organizations should follow to exploit social business benefits. Entire books can be produced on this topic, and since this blog post is already too lengthy, I will not attempt to address the governance, training, monitoring, policies, procedures and tools that are necessary to manage risks in social media. Instead, allow me to suggest three high-level barriers leaders and social media professional may address today:
New York Life CEO has been vocal on social media
advantages: "We're getting tremendous benefits." (Source)

  • Visible and assertive support from senior leadership: Senior leaders must set social business expectations for their firms and remove barriers. This begins with a recognition that social media is becoming a vital business medium and not just a place where the firm can make some fluffy tweets and posts. Socially mature organizations such as American Express are already driving business change via social, and as noted, the FFIEC has broached the subject of using social media for applications, lending, deposits and payments. A sea change is happening, akin to what is already occurring with mobile (where banks find they are saddled with unsustainable branch networks now that consumers can accomplish what they need on their smartphones). This is no longer a marketing issue, it is a business one, and if your senior leaders are not on board, social media professionals at financial organizations must raise the stakes for their bosses.
  • Recognize business and reputation risks equally with legal and compliance risks:  Too often, the attorneys and compliance specialists dominate the dialog of social media risks, but as we have seen, regulators also see risks with inaction and "an abundance of caution." In an industry starving for greater trust, stronger relationships and higher advocacy, it should be obvious that those who manage reputation and brand risks must have an equal voice with those who manage legal and compliance risks. In addition, FinServ firms should be reminded that what they do or not do in social media is a business decision, not a compliance one. Business leaders must listen to all concerns, challenge employees to develop and execute risk mitigation plans, and make decisions that are right for the firm, its stakeholders and it customers.
  • Set a social business vision to overcome ROI mania:  In 2000, ecommerce was just a single percent of total US retail; some companies saw this and felt no need to act while others recognized how ebusiness would soon impact the bottom line. It is 2000 all over again, and some companies are making the mistake of seeing social as something insignificant while others are rapidly embracing new social business models. ROI may be difficult (although not impossible) to come by in the short run, but firms will find it easier to justify investments in social business strategies if they look to how social will change financial services in the future rather than just how social can increase the bottom line today. In 2000, Borders cared only for whether ecommerce could move its bottom line immediately while Amazon saw and invested in the change. Which company does your firm choose to emulate, today?


Alan Bergstrom said...


Excellent post. Thanks especially for assembling all of the latest FinServ guidance into one nice cohesive package for all of us to digest. Social media is changing marketing and we do need to embrace it. Thanks again for your awesome insight! AB

Liz said...

Love it! Sending this post over to our legal counsel. :)

Terry said...

Superb job of pulling the pieces together. I like your point that not understanding the value of social media is as big a risk as non-compliance. It is a somewhat odd world when regulators call private (for profit) companies out for an "abundance of caution"

Terry said...

Superb job of pulling the pieces together. I like your point that not understanding the value of social media is as big a risk as non-compliance. It is a somewhat odd world when regulators call private (for profit) companies out for an "abundance of caution"

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Unknown said...

A very important post, Augie -- Thanks and congratulations are in order. Here's hoping that the various Compliance and Legal Depts. within the FinServ industry understand the SEC action, if only that, as the slap up side the head that it was so clearly meant to be. Of course that also applies to the various Sales and Marketing organizations in the industry, as well, for so supinely capitulating to their Compliance Overlords.
As a longtime employee of a life insurer, I've long marveled at how -- within an industry whose very purpose is to manage risk -- risks are routinely evaded by inaction rather than being actively managed or mitigated. This has certainly been the case heretofore, with only a handful of exceptions. I've had more than one discussion with Compliance folks and lawyers who admit, privately, that my more "liberal" interpretation of FINRA rules/regs is doubtless correct -- if only b/c that "liberal" interpretation accords pretty perfectly with common sense -- but publicly, before the respective SVPs of Agency, Brokerage, Marketing, etc., hold to restrictive, inaccurate, even deceptive misreadings. Why this is not considered sharmeful (rather than "conservative") is beyond me. So thanks once again for eloquently (and comprehensively) calling this out.

Augie Ray said...

Alan, thanks for the nice comment. Much appreciated!

Liz, I hope someone in your legal department reads it. They may not agree with it, but I hope they read it! :)

Terry, thanks, and I agree. How odd is it for regulators to scold (gently) companies for an "abundance of caution." It shows how stagnant and over-fearful firms have been, doesn't it?

Augie Ray said...

Ken, I'm not sure whether to laugh or cry at your comment. Thanks for the dialog!

Unknown said...

You can and probably should do both -- I know I have! But, with any luck, and promotion, your post today will go viral through Compliance & Legal & Sales & Marketing Depts. -- and maybe even reach a few CEOs -- in FinServ.

Terry said...

I did enjoy your comment Ken and as much as I enjoyed Augie's fine work, I think that hoping a blog post about compliance going viral, shows an abundance of optimism.

Unknown said...

Suppose I should have written "viral" -- really only meant that I hope this gets sent around to the Compliance malefactors.

Augie Ray said...


I'm sure Ken would agree that his (and my) hope this goes "viral" is more aspirational than realistic--but you gotta keep hope!


Unknown said...

Great post - we have similar issues here in Australia. Advisers slowly turning to social media but so many 'managers'hide behind the legal/compliance issues. Need a few more leaders.

Augie Ray said...

Colin, thanks for the comment. It comes as no surprise you'd face the same risk adverseness and hesitancy in Australia as we do in the US. I hope (and trust) we will begin to see greater innovation in the social space around the globe in the coming year!

In Search of the American Dream said...

Thank you for putting the latest guidance all in one place! I've bookmarked your blog!

Claire Coleman said...

Excellent article, as a technology lawyer who can see the benefits of social media for those embracing it in other sectors and who also works with financial services clients I think it highlights an extremely important issue.

Alina said...

Interesting and insightful i only wish i could find articles like these more often. Great info for someone starting up.
social media management