On January 25, 2010, the Financial Industry Regulatory Authority, or FINRA, issued a regulatory notice giving guidance on how FINRA rules governing communication with the public apply to social media sites that are sponsored by a financial firm or its registered representatives. The goal of this notice is to ensure that as the use of social media sites increases over time, investors are protected from false or misleading claims and representations, and that financial firms are able to effectively and appropriately supervise their associated persons' participation in these sites.

The following is a brief summary of the key issues addressed in FINRA's regulatory notice:

• Recordkeeping Responsibilities: Every firm that communicates through social media sites must retain records of any communications in order to comply with the Securities Exchange Act and NASD rules that require that a broker-dealer retain electronic communications related to its business. FINRA acknowledged that such a task may be challenging and could require the development of new technology systems to feed the data into existing systems for retaining email.
  
• Suitability Responsibilities: If a firm recommends a security through a social media site, it is required to ensure that the recommendation is suitable to every investor to whom it is made under NASD Rule 2310. FINRA recommended that firms use those features of social media sites that limit access to information to a select group of individuals to meet this requirement. Further, communications that recommend specific investment products may trigger the FINRA sustainability rule and other requirements under federal securities laws, which may create substantive liability for a firm or a registered representative. As a best practice, firms should consider prohibiting all interactive electronic communications that recommend any specific investment product, and any link to such recommendation, without the prior approval of a registered principal.
  
• Static Versus Interactive Content in a Blog: Whether content posted by a firm on a blog is "static" or "interactive" will determine which rules apply as discussed below. If a blog enables users to engage in real-time interactive communications, FINRA will consider it to be an interactive electronic forum. FINRA does distinguish between interactive and static content within the same blog. For example, a Facebook site could have static content as well as interactive posts. The portion of these networking sites that provides for this interactive communication constitutes an interactive electronic forum.
  
• Approval or Supervision of Content Posted on a Social Media Site: If the content to be posted on a social media site is considered to be static, it must be preapproved by a registered principal at the firm prior to posting.  If the content to be posted is considered to be interactive and unscripted, the firm is not required to have a registered principal approve these communications prior to use, but must still supervise the communications to ensure that they do not violate the content requirements of FINRA's communications rules. Static content on social media sites includes profile, background, or wall information.  Interactive content includes such communications as interactive posts on Twitter or Facebook.
  
• Supervision of Social Media Sites: A firm must adopt procedures and policies that are reasonably designed to ensure that electronic communications through social media do not violate FINRA or Security Exchange Act rules or laws. The supervisory system that will be optimal will be different for each firm; however, common themes of this system should include a mix of review by principal prior to use and post-use review, depending on the nature of the communication. A firm must also ensure through its procedures and policies that its associated persons who participate in social media sites for business purposes are appropriately supervised, have the necessary training and background for such activities, and do not present undue risks to investors.
  
• Third-Party Posts: When a third party posts content on a social media site established by the firm or its personnel, FINRA generally does not treat such posts as the firm's communication with the public, and thus the responsibilities described above do not apply to these posts. However, the third-party content will be attributable as the firm's communication if the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content.

Given the trend of clients and investors increasingly using social media sites to obtain pertinent business information, financial firms should expect a greater focus by FINRA and third-party observers in reviewing and evaluating content posted on such sites.

*     *     *     *     *

We encourage you to access a full copy of our Social Media White Paper here, and forward it to interested friends and colleagues.

For more information on FINRA's regulatory notice and the legal consequences of using social media sites, contact one of the Reed Smith's securities attorneys listed below, or your regular Reed Smith attorney.

Christopher P. Bennett Partner Chicago +1 312 207 3871

Amy J. Greer Partner New York/Philadelphia +1 212 549 0294 +1 215 851 8211

Jacob Thride Associate Chicago +1 312 207 3888

Kevin Xu Associate Chicago +1 312 207 6542