Social media may be revolutionizing the way much of the world communicates, but it hasn’t yet made a significant impact on the business of financial advisors.

Now, in response to mounting inquiries from dealers, the Toronto-based Investment Industry Regulatory Organ-ization of Canada has released draft guidelines for brokerage firms that spell out their compliance obligations when using social media. The draft guidelines, which were released on Feb. 7 and are out for a 60-day comment period, address “the unique compliance and supervisory issues” that may arise when reps use social media to communicate with clients and the public.

The IIROC guidelines state that any method of communication, including through websites such as Facebook or Twitter and blogs, is subject to IIROC rules; dealers are required to ensure that reps are in compliance with both IIROC rules and securities laws when reps are using these tools for business purposes.

The guidelines also clarify the fact that — for financial services firms, at least — social media is not going to open up a new, unregulated frontier in client/advi-sor communications. Rather, social media will be saddled with the same kinds of hefty supervisory burdens that more traditional communications channels face.

If dealers are worried that unleashing their reps on social media platforms could raise legal and regulatory issues, they are right to be concerned, says Dan Hallett, vice president and director of asset management with Oakville, Ont.-based HighView Financial Group and an active blogger.

“At extremes, dealers are surely worried about potential liabilities,” Hallett says. “And because social media is evolving so quickly, the law may not be evolving quickly enough. So, there may be some uncertainty as to how much potential liability a dealer faces as a result of one of its advisor’s statements on social media.

“If I imagine myself as the chief compliance officer of a firm with 500 or 1,000 licensed advisors,” he continues, “[I] have to have very well-defined policies and procedures around outlining what’s acceptable and what’s not. This is part of a dealer’s obligation under the law, so it’s a serious issue.”

Given the potential risks involving the use of social media, says Paige Ward, director of policy and regulatory affairs at the Toronto-based Mutual Fund Dealers Association of Canada, many MFDA dealers have either banned its use or limited it to a prescribed format, such as through a Facebook page that the dealer has set up.

Although Hallett says he understands why firms would be leery about letting their employees make too much use of social media, at the same time, he says, “I sympathize with advisors that want more freedom to voice opinions but can’t.”

The IIROC guidelines may clarify the regulatory status of social media in the brokerage business, but that isn’t necessarily going to make it much easier for advisors to voice those opinions.@page_break@The guidelines draw a line between “static” online content, which doesn’t frequently change, such as the background on a web page or profile information, and “interactive” content, which would include the ongoing discussions that can take place via Facebook or Twitter. Static content will typically be considered advertising, which requires pre-approval from the advisor’s firm. Interactive content generally doesn’t require pre-approval, but it does have to be supervised by the firm one way or another.

The IIROC guidelines say it’s up to firms how this activity is supervised, but they do have to be able to review and retrieve all such communications by their reps. The firms can do this by requiring reps to use social media only through the dealer or by insisting that copies of anything sent outside the dealer’s system also be sent to the firm for review.

Although interactive communications generally don’t require pre-approval, they also are riskier because a firm or rep could be implicated as endorsing someone else’s public pronouncements during the give-and-take of online discussions.

The IIROC guidelines say that dealers should “exercise extreme caution” when allowing people to comment or post on their websites, when linking to an external website or when using materials that could be considered sales communications from a third-party site: “Third-party posts may be attributed or considered an endorsement by the [dealer], thereby triggering regulatory and legislative requirements. For example, retweeting a client’s post or providing a thumbs-up may be considered an endorsement.”

Making things even murkier is the difficulty of drawing the line between static and interactive communications.

For example, in the U.S., the Financial Industry Regulatory Authority, which makes a similar distinction between static and interactive content in its guidelines on using social media, says that a blog posting by a rep would be considered static content, which must be pre-approved. In contrast, a comment from a rep on someone else’s posting could be viewed as interactive (requiring supervision but not approval).

But, if the rep is using the blog to engage in real-time communications with others, the blog itself would be considered interactive. Efforts to draw a line between static and interactive communication, while appealing in theory, are not entirely convincing in practice.

Given these blurry lines over what has to be pre-approved and what just has to be supervised (and the work required to supervise these communications, in the latter case), it’s no surprise that many financial services firms have so far steered clear of social media.

Nevertheless, Hallett welcomes the added regulatory guidance, saying, “The more clarity provided, the better.” By removing some of the regulatory uncertainty, he says, dealers will be able to develop “more well-defined policies” concerning social media.

Ward indicates that the MFDA also has contemplated the appropriate use of social media for its dealers, although it doesn’t yet have a formal policy. As with the IIROC guidelines, existing rules on advertising and sales communications would also apply to social media in the MFDA world, she says: “We will continue to monitor this area to determine if more specific guidance is necessary.” IE