As social networking sites such as Facebook, MySpace and LinkedIn evolve, the number of legal issues surrounding the online phenomenon has increased, raising more regulatory questions for financial advisors and their dealers.

For financial services companies, the popularity of these sites poses many important questions. Among them: can information posted on Facebook be used as evidence against an individual in court; can professionals, such as financial advisors, keep personal social networking activities separate from their professional lives; and how can financial services companies and advisors embrace the social networking phenomenon as a communications tool without violating compliance or ethical guidelines?

The difficulty with Facebook, from a legal and compliance perspective, is that it is a perpetually moving target, says Jesse Hirsch, president of Openflows Networks Ltd., a technology consulting firm based in Toronto.

“Everyone uses the Internet in their own unique way,” Hirsch says. “And with that, they bring their own sense of morality and their own sense of what is appropriate.”

As with all methods of communication — including private emails — advisors have to be aware of the implications before sending information off into cyberspace.

Although many financial services firms, including Toronto-Dominion Bank and Royal Bank of Canada, and their respective investment dealers, continue to prohibit the professional use of online social networking media by their advisors, others have started to embrace the technology.

“We have found that many Canadians are using these new social networks, and we want to go where our clients are going,” says Vicken Kazazian, senior vice president, career sales force, with Waterloo, Ont.-based Sun Life Financial (Canada) Inc.

Six months ago, that firm set up a “social online media” pilot project, in which 20 advisors — with the support of the firm — set up accounts with Facebook and LinkedIn. (The latter is a more business-oriented networking site for professionals.)

When it came to compliance concerns, Kazazian says, there simply weren’t any: “These sites are no different from any other media. So, when it comes to privacy and online compliance issues, it is consistent with our other policies on web media. And all our advisors are aware of that.”

Under the Sun Life program, advisors are permitted to set up pages and develop online relationships with others — just like any other Facebook or LinkedIn user. If an advisor finds that an individual is interested in becoming a client, the advisor can direct that person to his or her personal Sun Life website or set up a meeting. Sun Life’s online network restrictions are similar to those that prohibit clients from conveying trading instructions by voice mail or by email.

With Sun Life now in the final stages of the pilot project, the firm has begun analyzing the data. Kazazian hopes to make Facebook and other online social networks available to all Sun Life advisors and fine-tune the guidelines for their use. “We want to make [social networking] available,” Kazazian says, “and we want to ensure we have it right and that we are managing the risk appropriately.”

Evelyn Jacks, president of The Knowledge Bureau, a Winnipeg-based firm that offers professional-development programs for financial advisors, provides seminars and workshops for advisors about the use of social media as marketing tools.

Advisors must understand what they can and cannot do in online communication, including emails, Jacks says: “They need to identify what they want to communicate to their clients as a group, and what they want to communicate to individuals. Then, they have to develop a strategy around that issue that involves checking with their compliance department.”

Jacks agrees with Kazazian in that advisors should embrace social networking as a part of building their businesses. It should be a critical element of their “policies and procedures” business manual, she says.

Compliance issues that arise when dealing with online social media are never-ending, says Jacks. These can include understanding exactly how far an advi-sor can go in communicating with clients online.

For example, advisors can contact clients and offer messages, such as reminders to contribute to RRSPs, but they cannot offer investment advice. Nor should clients give trading instructions over the Internet.

A further wrinkle in the Facebook dilemma is the need for the firms’ compliance departments to approve all communications — such as brochures and newsletters — emanating from advisors in the name of that firm. But how can a firm approve every Facebook message sent out by an advisor?

@page_break@Sun Life has dealt with that matter by having its compliance department involved with the social networking pilot project from the beginning. The department set up a procedure for approving advisors’ Facebook communications and ensuring advisors understood the regulations from the beginning.

Beyond the compliance issues for financial advisors, social networking also presents legal questions concerning privacy. Facebook, for example, offers privacy settings that allow the user to determine which visitors can view certain information on his or her page. Are words and pictures posted as “private” by the user deemed to be private in the legal sense?

When the courts have been called upon to decide what is private — and what is not -— regarding information posted on social networking sites, their decisions have been conflicting. Some court cases have resulted in individuals having to hand over information they assumed was private and therefore inaccessible; others have won the right to keep their information behind closed doors.

In October 2009, the Ontario Superior Court of Justice rejected a bid by Toronto-based Royal and Sun Alliance Insurance Co. of Canada to gain access to the private Facebook account of Karen Schuster, who was suing the firm to recover compensation for injuries she suffered in a car crash. The court stated that although the insurance firm was denied access to Schuster’s Facebook account, its lawyers were still able to cross-examine the plaintiff about any information posted on her Facebook account that might contradict her testimony.

Although Royal and Sun Alliance was denied access to “private” content in that case, an earlier case, also in Ontario, had a different outcome. The judge in Leduc v. Roman ruled that anything posted in the private section of Facebook is treated in the same way as any other private material; if you are involved in a court case, your private conversations on the networking site must be turned over to the other side if there is a good reason to think they could be relevant to the case.

If those court cases tell us anything, it is that the line between what is public and what is private in the online world is a blurry one.

“I think that there is an important distinction to be made between employing privacy controls and considering the materials you post to Facebook as being private,” says Hirsch. “I would definitely not consider [Facebook] as being private. And I would strongly encourage people to assume anything you upload to Facebook, or any other social media, can and will be used against you in a court of law.”

Still, although some financial services firms are reluctant to become a part of the trend in embracing social media, others recognize social media as an important communications tool.

“Where, a few years ago, we may have said, ‘Use these sites with caution or stay away’,” says Hirsch, “today, it is almost irresponsible to steer businesses and many professionals away from them. To neglect to learn how to use [social networking] responsibly is a severe disadvantage when your competitors are doing the opposite.”

Kazazian agrees: “There is no going back on Facebook. It is here to stay, and if Canadians want to do business, then we have to be there, too.” IE