Regulators Feeling ‘Social’ Pressure; In Age of Twitter, Decades-Old Rules That Don’t Address New Media Pose Challenge for Officials

April 10, 2013, 6:04 p.m. ET

Regulators Feeling ‘Social’ Pressure

In Age of Twitter, Decades-Old Rules That Don’t Address New Media Pose Challenge for Officials

By JESSICA HOLZER

WASHINGTON—The Securities and Exchange Commission’s move allowing companies to convey market-moving corporate news via social-media sites stems from a continuing debate at regulatory agencies: how to protect consumers, depositors and investors in the age of Facebook and Twitter.

Agencies from the SEC to the Federal Trade Commission are under increasing pressure from businesses clamoring for guidance on how they can use social media without running afoul of federal securities, advertising and other laws. Financial-advisory firms want clearer guidance from the SEC about how investment advisers can use social-media sites to court clients, while Wall Street firms want to relax rules requiring them to store every video, tweet or other piece of content their employees post on sites.

In the middle are regulators, who say they are wary of updating sometimes-decades-old rules over fears of chipping away at long-standing protections and who worry about their ability to keep up with the proliferation of social-media sites.“One of the reasons it’s tricky to give guidance in social-media marketing is it’s relatively new and it’s not always clear what ordinary consumer expectations are,” said Mary Engle, the FTC’s associate director for advertising practices. There are also “so many more outlets and advertisements for us to monitor and keep up with,” she said.

In recent months, the SEC’s staff has rebuffed a few requests from large financial firms seeking relief from rules that ban investment advisers from using testimonials in advertisements, according to a person familiar with the requests. The SEC considers testimonials inherently misleading because advisers are likely to involve only clients who have had positive experiences. Firms say the 1960s-era rules restrict their sales forces from being able to use social-media sites, since a third party who “likes” an adviser on Facebook or endorses an adviser’s skill on LinkedIn could constitute a testimonial.

The SEC issued guidance last year saying a third party’s use of the “like” button could be viewed as a testimonial and suggested investment-advisory firms consider requiring preclearance before posting on social-media sites. SEC staff are currently working on additional guidance to provide more clarity about how to use social media without violating advertising rules, but the agency is unlikely to soften its prohibition against advisers using testimonials, according to the person familiar with the matter. An SEC spokesman declined to comment.

“I think the staff is unlikely to conclude that, in this newest iteration of technology, all the rules don’t apply, because things could get entirely out of control,” said Robert Plaze, who stepped down as deputy director of the SEC’s investment-management unit last August. “All of the fraudulent activities will simply move over to the social media.”

Still, Wall Street firms continue to push the SEC to update rules that don’t take into account social media. For instance, firms are asking the SEC for permission to cut back on archiving the reams of video and other content that brokerage-firm employees are posting on Facebook and other social-media sites. SEC rules require brokerages to store all business-related records, including electronic communications. The industry wants to know if all such posts and tweets must be stored even if they are duplicative, said Melissa McGregor, a lawyer at the Securities Industry and Financial Markets Association. “Our goal is to have reasonable interpretations of existing rules but yet allow firms to use social media to the greatest extent possible while preserving investor protection,” Ms. McGregor said.

Other regulators have moved more quickly to incorporate social media into their rules. The Financial Industry Regulatory Authority, Wall Street’s self-policing body, liberalized rules for brokers’ written communications in 2010, saying that “interactive” postings on social-media sites don’t require firm preapproval like other “static” advertisements and sales literature. And the Federal Trade Commission in 2009 told advertisers they should monitor the claims made by paid endorsers on social-media sites because they would be liable for them. Last month, the agency said celebrities touting products via Twitter must declare whether they are getting paid for the endorsements. It suggested they append “#ad” or “#sponsored” to their tweets.

The FTC is also keeping a close eye on debt collectors who may be using Facebook and other social-media sites inappropriately to contact debtors, said Christopher Koegel, an assistant director in the division of financial practices. For instance, debt collectors are prohibited from disguising their identities while trying to collect a debt. “If you’re a debt collector issuing a ‘friend’ request on Facebook, you have to be very clear about who you are,” Mr. Koegel said.