Social Media and Investment Advisers

Is the sky falling? Has the underworld frozen over? These are questions that many in the financial industry may be asking themselves since the Securities and Exchange Commission (SEC) issued a National Examination Alert on Investment Adviser Use of Social Media on January 4, 2012.¹

Let me assure you that the world is not coming to an end but the SEC is taking a closer look at social media following a recent enforcement action where it was discovered that a person, claiming to be a broker-dealer and investment adviser, was defrauding individuals by posting fraudulent information to social networking sites. 

In the SEC notice, the staff reminds firms of their obligations under Adviser Act Rule 206(4)-7 to adopt and to periodically review policies and procedures relevant to the oversight of their business and associated persons. The SEC reminded firms that in light of changing technologies, review of procedures surrounding social media should be performed to ensure compliance with various provisions of federal securities laws, including antifraud and recordkeeping provisions.

Some observations made by the staff were also noted. Take aways include:

Specific Procedures: Policies and procedures should be specific. Lumping policies and procedures regarding various types of communications media into one overriding policy can cause confusion as to applicability to the specific media. Some areas that firms should consider when creating procedures relative to social media include:

1. Usage Guidelines – Consideration should include which social networking sites can be used, whether communications can be used only with existing customers or to solicit new customers,
   or if the firm will permit social media use for business purposes at all.

2. Content Standards – The firm has to consider what types of communication it will allow, such as recommendations, investment performance, etc., and communicate these clearly.

3. Monitoring and Approval – How the firm will effectively monitor communications and how
   often social media communications are reviewed are also important components of effective procedures in this area. Setting guidelines on whether pre-approval would be required can
   also be important, depending on the types of communications being permitted.

4. Resources – When determining what type of usage to permit, if any, a firm needs to consider
   if the firm has staff to monitor social media use or if there are systems available to assist in monitoring or keeping records.

5. Information Security – Protecting confidential information and systems from unauthorized access is crucial, so firms need to consider what type of risk the use of social networking websites could pose.

6. Third-Party Posts – In light of the general prohibition against testimonials in the Adviser Act,
   the firm needs to develop policies around defining what third-party posts could be considered
   as such and what to do about them if they are determined to be testimonials.

7. Recordkeeping – Advisers are required to maintain copies of communications in a readily accessible place for a period of five years. The rules do not differentiate between paper and electronic communications. Therefore, if the firm will be allowing the use of social media for communications for business, then the firm can capture and retain both incoming and
   outgoing communications in these forums.

The above are just a few of the items that firms need to consider when creating policies and procedures relative to investment adviser representatives, solicitors and others associated with the firm using this rapidly changing communication forum.

For more information on the use of social media in your investment adviser, and associated regulatory obligations, please contact one of our investment adviser compliance specialists at 617-606-7211 or 603-434-3594.

¹http://www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf

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