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Social networking boosts legal, regulatory compliance headaches

Lucas Mearian | May 10, 2010
For companies, the sites are too valuable as sales tools to block

In a more recent example, several hedge-fund executives and managers with the Galleon Group, were charged with insider trading. The evidence that cracked the case open? A single text message.

Most recently, the Financial Industry Regulatory Authority (FINRA), the enforcement arm of the SEC, issued Regulatory Notice 10-06, a document presented in a Q&A format, that provides guidance on the responsibilities of firms to supervise the use of social networking sites. The guidance was issued to ensure that recommendations to clients on social networks are suitable and that their customers are not misled.

"The FINRA guidance has sent the financial community scrambling to figure out what to do," Ritter said. "Let's say a broker becomes a fan of a company on Facebook. Is that an endorsement? In essence it is."

Other regulations focused on corporate transparency and consumer privacy will likely also affect controls around social networking communication. Those regulations include the Sarbanes-Oxley Act, HIPAA (the Health Insurance Portability and Accountability Act) and the Gramm-Leach-Bliley Act of 1999.

Social networks too valuable to block

Social networking is an enormously popular way to communicate with prospective clients and to generate sales leads, particularly among younger financial services employees, experts say.

"We've heard anecdotally that the top advisers at [a leading financial planning and investment firm] - the number one and two advisers - are some of the most proficient users of social media," said Chad Bockius, vice president of marketing and product strategy at Socialware, a provider of SaaS social network monitoring and management tools.

Bockius said Socialware is about to publish the results of a survey of more than 200 financial advisers who were asked how many new clients and new sales leads they generated as a result of social media. "The results are pretty impressive, as in 20%," he said.

"You still have people saying, 'we don't need to use Facebook or need to be on LinkedIn. Those tools are for high school kids, or they're for use by people stopping by Starbucks.' That's just simply not the case," Bockius continued. "There really is tangible business value you can get from these tools."

King said the problem with social networking is the business side of a company wants to interact with the younger generation of customers through their preferred channel, but the company's IT side has a hard time finding the tools necessary to control that traffic.

New tools for compliance

"The compliance and security folks are saying, 'Whoa, we're completely unable to adopt these communications channels given the regulatory requirements," King said. "We're in a unique position because we're a firewall company and can see and control these applications."


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