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8/15/2011
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Socialware Cashes In As Finance Gets Compliant

As financial advisors get clarification on compliance rules for social media, Socialware's business grows.

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Clarification of the rules for financial advisers' use of social media, combined with bolder experimentation in its use by major firms, are a couple of the factors Socialware said led to a new infusion of venture capital.

Socialware said Tuesday it got $7 million in a Series C funding round led by Morgan Stanley Expansion Capital. Socialware is one of the leading vendors helping financial firms with the requirements regulators impose on their use of social media. Those requirements include provisions for pre-approval of some forms of content--for example, the content of an adviser or broker's LinkedIn profile, which is treated as a sort of advertisement. Other information posted to a social network, such as a routine status update, must be captured and archived for later review. Socialware helps organizations manage the social media activity of their representatives so communications get the appropriate treatment with approvals and archiving.

Actually, the distinction between what must be pre-approved and what must be archived hasn't been clear enough to meet the satisfaction of every compliance and legal department, Socialware CEO Chad Bockius said in an interview. While some major firms like Morgan Stanley have opened up to broader use of social media by their representatives, many others have taken the conservative stance of requiring all social media communications to get pre-approval. That should change now that the Financial Industry Regulatory Authority (FINRA) has proposed a new set of rules, which Bockius believes go a long way to clarifying the boundaries.

"This is making it easier to adopt social media in a compliant fashion," Bockius said. "The new rule that's been submitted gives advisers the ability to use the medium the way it was intended. Just think if you had to get every email preapproved--email wouldn't be very useful for you."

As he explains in a blog post, FINRA is proposing to establish much more specific rules for social media, where previously it had only published guidance on how existing rules from traditional categories of advertising and correspondence should be applied to social media. So far, this is only a proposal to the Securities and Exchange Commission, but even in the absence of formal approval it gives clues to how FINRA plans to enforce its rules.

The proposed rules would establish three categories of communications: institutional communications, retail communications, and correspondence. That's a simplification from the current six categories of content. Advertisements and sales literature would fall into the institutional category, requiring thorough pre-approval before publication. Correspondence under these rules would be defined as a communication to fewer than 25 people and would not require pre-approval. Retail communications is an in-between category of communication sent to or made available to more than 25 people and would be more restricted. However, FINRA explicitly specifies that communications with the public in interactive forums do not require pre-approval.

Bockius said the imperfect match between FINRA's previous guidance and the official rules had been a cause of confusion, so getting this new interpretation into the rules should open up new possibilities. The proposed rules are also easier to understand, he said.

The essential rules against making exaggerated claims about the performance of a stock, or implying that past performance guarantees future success, remain unchanged. Bockius points to the enforcement action where a California broker's ill-considered tweets earned her a $10,000 fine and a one-year suspension.

Of course, those are the same rules that apply in any medium. Bockius said he is encouraged that the industry will move beyond focusing on compliance alone, toward taking effective advantage of social media.

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