Haunted By A Ghost: Snapchat, Wall Street, And The Evolving Focus Of Financial Social Media Regulation

Reproduced with permission from Securities Regulation & Law Report, 45 SRLR 1488, 08/12/2013. Copyright _ 2013 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

A new service, Snapchat, has joined the constellation of social media services with potential business implications. Snapchat is a mobile application, originally aimed at teenagers, which allows users to send photos and text that ''disappear'' from a recipient's inbox within 10 seconds of viewing. Although the temporary nature of its messages is a key feature of Snapchat, there are ways around the permanent deletion of these messages, and forensic data vendors can retrieve Snapchat images from a phone's memory.1 Additionally, the application tracks the date and time each message is sent, received, and opened, as well as the identity of senders and recipients.

As of June 2013, Snapchat, whose logo features a smiling ghost evocative of the fleeting quality of its message product, said it was processing more than 200 million user messages per day.2 New York magazine recently reported that Snapchat had transcended its intended demographic and that bankers on Wall Street were ''obsessed'' with using the smartphone application to share embarrassing and incriminating pictures and texts with friends while avoiding more permanent social media sites such as Facebook, where a current or prospective employer might find them.3

Since the New York article, the media has been buzzing about the use of Snapchat on Wall Street for social purposes.4 It does not take much imagination, however, to envision how traders, bankers, and broker-dealer and public company employees could move from personal to business use of Snapchat, or the problems that this evolution could bring.5 And, there is no reason to believe that the U.S. Department of Justice, U.S. Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and other regulators and agencies have failed to take note of this potential. When asked about the use of Snapchat in a July interview regarding recent insider trading investigations, Preet Bharara, U.S. Attorney for the Southern District of New York, explained that such forms of communication could come back to ''haunt'' financial institutions and their employees, and he emphasized: ''Nobody should feel safe because they're using a particular method of communication because . . . we have case after case where . . . [the counterparty to the crime] will come to the government and reveal all the criminal activity. Nobody should feel safe, no matter what form of communication they are using.''6 Thus, it is critical that public companies, regulated banks, broker-dealers, and others take steps to prevent this social media phenomenon from becoming their next regulatory and discovery headache.

This article looks at the challenges Snapchat represents in the context of the ever-expanding regulatory focus on social media usage by registered brokerdealers and registered investment advisers (collectively, ''regulated entities'') and public companies. We also offer suggestions of prudent steps companies should consider to stay ahead of the regulatory curve.

Snapchat, Social Media, and Regulatory Scrutiny

Regulators have a long history of monitoring social media and electronic communications, dating back to a 1996 FINRA alert concerning a broker-dealer's intentions to develop a website and its use of electronic mail and chat rooms. At that time, FINRA indicated that it regarded websites as advertisements and participation in chat rooms as public appearances.7 The SEC has focused on social media since at least 2008, when it published guidance on how companies can use websites to provide information to investors.8

In June 2013, FINRA further dove into the world of social media by issuing a targeted examination letter spot-checking broker-dealers' social media communications and policies.9 Further, in April, the SEC issued guidance on the use of Twitter, Facebook, and other social media sites by public companies after Netflix's chief executive officer posted company news on his personal Facebook newsfeed.10 Immediately thereafter, the New York Stock Exchange (NYSE) issued guidance for NYSE member firms on the topic.11 Additionally, FINRA has recently settled matters concerning a registered person's use of Twitter.12

Legal and Regulatory Considerations Regarding Social Media

Many of the key rules and regulations governing the financial services industry, and applicable to regulated entities, focus on supervision, surveillance, disclosure, transparency and conflicts of interest. Narrower rules on some of these issues also apply to public companies. Given the many regulatory requirements within this framework, the rapid development and sweeping popularity of Snapchat and other social media have had a significant impact on companies and their employees, as well as regulators focused on whether social media is consistent with regulatory requirements.13

Each new form of social media moves regulators to reassess existing regulatory frameworks. They may decide to modify existing rules and regulations...