However, Chad Bockius, CEO at Socialware, a company that provides a middleware platform for wealth management and financial advisory firms, says these fears are overblown, because many companies, including his own, offer compliance solutions that make reviewing, monitoring and archiving manageable. In fact, he believes some firms are hiding behind the compliance issue in an effort to avoid dealing with social networking at all.

And that’s a dangerous practice, because prohibiting social networking can lead to serious problems. “A state of prohibition puts you at more risk because financial advisors will do it anyway,” he says. “We did a study about social networking and found that 40 percent of financial advisors surveyed were knowingly violating their company’s policies. Prohibiting it is actually more risky than implementing policies and a technology solution that will enforce compliant strategies.”

Worse yet are reports filtering out from the SEC that advisors are lying on their social networking profiles, particularly on LinkedIn profiles. That’s just as bad as lying in an advertisement or lying on your website, Bockius says. “A number one concern for regulators around social media is truth in advertising,” he adds. “People can’t make claims that aren’t true and firms have to monitor what people are writing and saying in electronic communications.” Recommending specific investments or investment products is another no-no.

While guidance from FINRA isn’t exactly crystal clear or step-by-step, the agency has established guidelines in its January 2010 notice 10-06.

FINRA’s Social Networking Task Force is also working on updating guidance going forward, in an effort to be more responsive to concerns surrounding this issue.

While FINRA doesn’t have regulatory authority over registered investment advisors , it makes sense for RIAs, as well as broker-dealers and wirehouses that are regulated by FINRA, to pay attention to what FINRA is saying about social networking compliance and build policies around that guidance. The bottom line with social networking policies is that social networking is a type of electronic communication, so you should be guided by FINRA and SEC pronouncements, notes Bockius. “Not much has really changed,” he says. “There are some different issues surrounding static and interactive content, but regulators have been pretty consistent in what they’ve been concerned about over time.”

Establishing a compliant policy

There are five aspects to establishing a compliant social networking policy:

1. Establish policies. The first step is to establish a comprehensive social media and electronic communications policy that covers which social networking activities and sites wealth managers and advisors can engage in and use; dos and don’ts surrounding what can and can’t be shared in what formats, and how advisors go about getting posts and communications approved; how communications will be archived or stored; and how activities will be supervised and the ways that policies will be enforced.

Policies should be in writing. Employees should acknowledge that they have received a copy of the policies in writing, and rules should be regularly updated as FINRA, the SEC and state regulatory policies evolve.

2. Train staff on policies. Both FINRA and the SEC have made it clear that it’s not enough to put together a manual and drop it on everyone’s desk. Staff must be trained in your specific policies surrounding social networking, including blogging.

FINRA was very specific about this in it’s notice last year: “Firms also must require that only those associated persons who have received appropriate training on the firm’s policies and procedures regarding interactive electronic communications may engage in such communications.”

Bockius notes that training and education is an important aspect of executing any social networking policy. “You don’t have to have a really complicated training plan, but you have to have a plan and it has to make sense,” he says. “A good plan does not involve having advisors put their tweets in a spreadsheet and e-mail them to their supervisor periodically. If firms give their employees the tools to manage social networking in a compliant way, train employees in using them, and enforce their policies, there is no reason why it shouldn’t work.”

3. Supervise activities. Firms must supervise social media activities. There are several ways to accomplish this objective, which include approving some or all postings in advance or implementing an after-the-fact review process. This could involve sampling and lexicon-based search methodologies, which FINRA discusses in its Regulatory Notice 07-59.

4. Archive communications. Every tweet, YouTube video, blog post and LinkedIn or Facebook posting must be archived. As with other data, this material should be backed up both on and off-site to make sure it’s not lost if there is some type of disaster or technical problem.

5. Enforce policies. Policies must be enforced, which is likely the message that the SEC is trying to get through via its social media sweeps. If you establish policies but don’t enforce them, you’re asking for trouble. This is a perfect job for the compliance department, who should set up mechanisms for enforcing policies and documenting how those policies were enforced.

Why Bother?

Given all the hassles involved in social media compliance, why bother? Because it’s where your clients and potential clients are, and more and more client relationships will be made or broken via social networking, Bockius says. “This industry is built on networking,” he relates. “Forget the ‘social’ aspect of it and think about it as another type of networking. These sites are the greatest innovations in networking we’ve ever seen. It’s changed the process of relationship management, of attracting new clients and relating to existing ones."

“Think about the number of relationships and the depth of those relationships that you can manage with social networking and social networking tools,” he adds. “It’s way, way more than you could manage before Twitter, Facebook, LinkedIn and the other sites. It’s not about ‘social networking.’ It’s about wealth managers and advisors growing their business, staying competitive and staying connected with clients and potential clients in the way they want to be connected with. It’s a fundamental business relationship management issue.”

This is the first in a series of articles on social networking. The next part, Six Ways to Develop Your Social Networking Strategy, will be featured next week.