Home > Property & Casualty > Social media use as a means to communicate with investors is on the rise at banks and financial firms: beware the risks

Social media use as a means to communicate with investors is on the rise at banks and financial firms: beware the risks

twitter_wallstWith the release of the Securities and Exchange Commission’s new rules governing disclosure of social media use, an increasing number of companies are using sites like Facebook and Twitter to communicate with customers. Financial firms and banks are among those that are allowing employees to use social media sites on the job to post market updates and communicate with investors through tweets and status updates. Bank of America, Morgan Stanley, Citigroup Inc, and Goldman Sachs are among those on Wall Street incorporating social media use into their corporate communication strategies, granting stock analysts and traders use of Facebook, Twitter and LinkedIn in order to follow market trends and release financial information.

Despite the A.P.’s Twitter hoax last month, (which caused a brief drop in the Dow Jones Industrial Average after a false report about a bomb at the White House), social media use continues to expand throughout the corporate world. In the past, many banks restricted employee access to social media, since the SEC requires securities firms to store all communications and activity. But with sites like Twitter becoming an increasingly important news source, (and often, more up to date than traditional news media outlets) employee tweeting and posting has become a popular method for these groups to stay connected and informed.

The use of “news scraping” computer programs is one way corporate businesses have expanded their social media strategy. Many investment firms, hedge funds and banks are using sophisticated computer programs that can scan news streams, including those from Twitter and other sites, to make quick buy and sell decisions. The technology has been around for several years, but its use among financial firms has more recently caught on, thanks in part to the SEC’s latest social media ruling. The programs track news streams from the media, government filings and social media sites using an algorithm for pre-programmed keywords that may drive financial markets and individual stocks. Based on those keywords, along with legitimacy of the news source, the program triggers buy or sell orders within seconds of the scan. The programs can also look for tweets using the words “hacked” or “hoax” to sift through fraudulent tweets, which helped resolve last month’s hoax about the White House so quickly.

On the other hand, securities regulators and some industry groups worry about the growing use of social media in the financial world. The two groups have joined forces to block new state laws that aim to protect employees’ privacy and that ban financial firms from looking at employees’ personal social media accounts. According to the National Conference of State Legislatures, social-media privacy legislation has been introduced or is under way in 35 states since the beginning of this year. Securities regulators say the laws put investors at risk and that spreading financial information across social networks increases the chances for Ponzi schemes and other fraudulent activity. They’re also concerned that it puts costumers at risk and will hinder firms’ efforts to detect serious problems. Despite their complaints, legislators have rejected the groups’ requests to create carve-out clauses in social media laws, while a spokesperson for the SEC responded only by saying that the agency “will continue to monitor . . . the development” of new state laws.

With the law and regulatory guidance so unsettled, a money manager, banker or manager at any entity facing oversight from the SEC has to feel very exposed to second guessing of any decision on use and monitoring of social media by their employees. Insurance in the face of this uncertainty must also be a flimsy barrier to financial loss, although insurance underwriters around the globe are presenting newly minted “solutions” even before the space is settled.

One key consideration is that current policies not contain restrictions for claims against the insured company resulting from social media use. These restrictions are showing up more frequently, partly because the risks are at least theoretically large and also as a lead in to the development of additional lines of coverage with specific grants of protection for these claims. The main differences between an employee’s misstatements in the privacy of his or her own traditional communication (private conversation, letters or email) and the use of social media to reach out, is the potential size of the audience and immediacy of the impact. With social media, the risks are magnified and containing the spread of misinformation or misstatement is more difficult.

About the Author

Roger Haynes is an Executive Vice President and the Financial Risks Practice Leader at William Gallagher Associates. He has over 25 years of experience with specialty claims and policy form issues that arise with all types of financial clients including banks, broker dealers, money managers, mutual funds, investment advisors, insurance companies and lease and finance companies.

617.646.0220 | Rhaynes@wgains.com | Connect with Roger on LinkedIn

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