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Larry Gonzales, Our Texas State Representative, District 52 » Wall Street vs. Its Employees’ Privacy

Wall Street vs. Its Employees’ Privacy


State efforts to block companies from monitoring employees’ personal Facebook FB +2.92% and Twitter accounts are under fire from a new front—securities regulators.

An unlikely alliance of regulators and industry groups is seeking to carve out exemptions in state laws that would allow certain financial firms to sidestep bans on looking at the personal social-media accounts of employees.

Wall Street’s self-regulator, the Financial Industry Regulatory Authority, says financial firms need a way to follow up on “red flags” suggesting misuse of a personal account, according to a spokesman. Finra has asked lawmakers in about 10 states to make changes to proposed legislation, the spokesman said.

Securities regulators worry that the raft of new laws aimed at protecting employees’ privacy puts investors at risk. They say the fast spread of financial advice on social networks such as Facebook Inc. and Twitter Inc. could create new channels for Ponzi schemes and other frauds, and that fighting those frauds will be harder if state lawmakers snarl efforts by companies to monitor what employees are pitching to investors.

California, Illinois, Maryland and Michigan adopted social-media privacy laws last year, and a similar new law in Utah takes effect in May. Social-media privacy legislation has been introduced or is under way in 35 states since the start of 2013, according to the National Conference of State Legislatures.

Supporters of the new laws say they are needed to protect employees, even when their employer may be the subject of tweets or other messages made using an employee’s personal account on a social-networking website.

“We’d balk if an employer said, ‘I want to look at your photo albums once a week or listen in on your dinner party conversation,'” said Allie Bohm, an advocacy and policy strategist at the American Civil Liberties Union. “By allowing them to monitor your social-media presence, that’s what they might be doing.”

The split shows how financial firms and regulators are struggling to change their ways in the Facebook era. Earlier this month, the SEC issued new guidance that lets companies use social media to disseminate market-moving news. Companies must tell investors which ways they intend to communicate, such as by tweets or Facebook posts.

California’s social-media privacy law went into effect Jan. 1. Before that, the Securities Industry and Financial Markets Association, a trade group, made a request to California Gov. Jerry Brown to veto the bill. Sifma says some employee-privacy provisions are at odds with existing rules that brokerage firms police investment advice tweeted and posted by their employees. California’s employee-privacy protections would place firms in the “untenable position of having to violate either state law or their Finra obligations,” the group wrote in a letter to Mr. Brown.

California lawmakers rebuffed requests by Finra and securities-industry groups for a carve-out clause in the state’s new law.

A spokesman for Mr. Brown, a Democrat, referred to a comment he made after signing the bill. California’s move will “protect all Californians from unwarranted invasions of their personal social-media accounts,” Mr. Brown said.

Legislation often includes narrow language that allows employers to conduct legitimate checks, such as during a formal investigation into alleged misconduct by an employee.

Sifma said such a change in the California law is “helpful,” but fails to address the legitimate need for general monitoring and recording of any business-related tweets and postings. The new law “puts customers at risk, as it will be much harder for firms to detect serious problems,” the trade group added.

The Financial Services Institute, which represents independent broker-dealer operations, believes the state laws and pending legislation could place “investors at risk, as well as creating a significant headache for brokerage firms,” according to David Bellaire, the group’s general counsel. Most financial firms use specialized software to keep track of what their employees are tweeting and posting on business issues, a spokesman added.

A Securities and Exchange Commission spokesman said the U.S. agency is “monitoring developments” in states. More than 65 social-media privacy bills have been introduced so far this year, according to Sifma. Much of the proposed legislation will die if it isn’t passed by lawmakers before their current sessions end in late May or June, according to the National Conference of State Legislatures.

Financial advisers are keen about the potential of social networks to interact with investors and lure new business. More than a one-third of financial advisers use social media for business purposes several times a week, according to an April survey by American Century Investments, a fund firm.

For several years, criminal authorities have wrestled with challenges caused by communication about illicit activities, from securities fraud to drug dealing to terrorism, through messaging tools in social networks, videogame systems and other digital platforms.

Providers of such services generally aren’t required to build capabilities for law-enforcement surveillance into their systems. Telephone companies must do so under a 1994 federal law.

The Federal Bureau of Investigation and other agencies have approached some technology companies to request that they erect monitoring systems or let the U.S. government use its own systems, people familiar with the efforts say. The tools can be complicated and costly, though the government sometimes reimburses companies.

Some companies comply with the government’s requests, but other firms have refused. “These negotiations can take a long time. They can take years,” said Michael Sussmann, a former Justice Department official who now is a lawyer at Perkins Coie LLP and has represented companies that got such requests.

Finra has taken some action to crack down on rogue tweets. Jenny Quyen Ta , founder of Titan Securities, a broker-dealer in Dallas, was disciplined in 2010 for alleged misconduct that included using her Twitter account to tout stock in Advanced Micro Devices Inc. AMD +5.22%

Examples of allegedly “unbalanced” and “overwhelmingly positive” tweets included one from September 2009 that said, “Keep an i on AMD ppl!” and predicted its share price would double.

Ms. Ta agreed to pay a $10,000 fine to settle the case, without admitting or denying the allegations. A spokeswoman for Titan declined to comment.

Courts haven’t ruled on whether the state laws or Finra rules should take precedence on employee privacy. “It may be that the Finra rules will pre-empt the state ban, but that’s not been tested,” said Scott Rahn, a lawyer at Greenberg Traurig LLP.

Brian Rubin, a partner at law firm Sutherland Asbill & Brennan LLP, said the continuing uncertainty “can become serious” because “firms can be caught between a rock and a hard place.”

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