Does your Investment Adviser Firm Have a Social Media Policy?

Social media such as Facebook, Twitter, LinkedIn, or blogs have become popular mechanisms for companies to communicate with the public. Social media allows companies to communicate with clients and prospective clients, market their services, educate the public about their products, and recruit employees. Social media converts a static medium, such as a website, where viewers passively receive content, into a medium where users actively create content. However, this type of interaction poses certain risks for investment advisers and this topic has been a hot button for securities regulators. 

The SEC previously issued a National Examination Risk Alert on investment adviser use of social media. As a registered investment adviser, use of social media by a firm and/or related persons of a firm must comply with applicable provisions of the federal securities laws, including the laws and regulations under the Investment Advisers Act of 1940 (“Advisers Act”). The Risk Alert noted that the various laws and regulations most affected by social media are anti-fraud provision, including advertising, compliance provisions, and recordkeeping provisions. Advisers Act Rule 206(4)-7 requires firms to create and implement social media policies, and periodically review the policy’s effectiveness. 

Anti-fraud provisions with respect to advertising are probably most affected by the use of social media. All social media use and communications must comply with Rule 206(4)-1. While advertising policies should already be included in a firm’s compliance manual, such policies may not be sufficient enough to address some of the concerns with advertising in the context of social media. Establishing a specific policy to address social media may be prudent.

The area of advertising that has caused the most confusion is the prohibition on the use of testimonials. The SEC has previously defined testimonial to include a statement of a client’s experience with, or endorsement of, any investment adviser. Firms and IARs must ensure that third-party comments on their social media sites do not constitute a testimonial. Furthermore, the SEC vaguely discussed whether the popular “like” function on many social media sites would be deemed a testimonial:

[T]he staff believes that, depending on the facts and circumstances, the use of “social plug-ins” such as the “like” button could be a testimonial under the Advisers Act. Third-party use of the “like” feature on an investment adviser’s social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client's or clients' experience with an investment adviser or IAR. If, for example, the public is invited to “like” an IAR’s biography posted on a social media site, that election could be viewed as a type of testimonial prohibited by rule 206(4)-1(a)(1).

The types of policies that firms must create concerning advertising and testimonials depend greatly on the function of a specific website. For instance, approving the firm or IARs use of certain websites may turn on whether that website allows for review and approval of third-party comments before such comments are posted on the site or whether the “like” function can be disabled. A firm’s monitoring capabilities and the latitude it wants to provide employees with respect to personal use of social media cannot be ignored either.

The SEC has outlined various factors that should be considered by an investment adviser when evaluating the effective of their compliance program. These factors are:

• Usage and content guidelines and restrictions on IAR use of social media whether on behalf of the firm or for personal use
• Mechanisms for approval of social media use and content;
• Monitoring of social media use by the firm and IARs and the frequency of monitoring;
• Consideration of the function or risk exposure of specific social media sites;
• Establishing training and requiring IAR certification;
• Whether access to social media poses information security risks; and
• Firm resources that can be dedicated to implementation of social media policies.

There are various considerations firms must take into account when establishing social media policies or evaluating the effectiveness of its existing policies. If your firm needs assistance, the Cosgrove Law Group, LLC can assist with creation or review of such policies.

The Use of Social Media for Investment Advice. The Struggle Between Employee Privacy Laws and Investor Protection

The landscape of communication has changed drastically in the past decade.  Information has the capability of widespread reach through the use of various sources.  In particular, social media has become an important channel of communication.  As such, the SEC has recently issued new guidance that allows financial firms to disseminate market related news via social media so long as firms alert investors which social media platforms will be used to deliver such information.  Financial firms’ use of social media must be in compliance with Regulation FD which “requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively…to ensure that all investors have the ability to gain access to material information at the same time.” 

Another emerging issue in the height of social media is employee privacy.  Recently, various states have made efforts to curtail employers’ attempts to monitor employees’ personal Facebook and Twitter accounts.  California, Illinois, Maryland, and Michigan adopted social media privacy laws last year while a similar law in Utah takes effect in May.  Variations of social media privacy laws have been introduced in 35 states since the beginning of 2013.

Securities regulators, however, have requested states to carve out exceptions in such state laws so that certain financial firms can maintain a close watch of the social media accounts of its employees in order to monitor whether personal accounts are being used to give investment advice. Regulators such as FINRA worry that social media networks can create new channels for Ponzi schemes and other frauds and ultimately put investors at risk. According to a survey conducted by American Century Investments, approximately one third of financial advisers use some form of social media several times a week to interact with investors.

Before California’s employee-privacy laws took effect at the start of the year, FINRA and other related groups requested that either the law be vetoed or an exception carved out for financial firms.  California rejected this request.  California’s law prohibits employers from requiring or requesting employees’ to: (1) disclose his or her username or password for the purpose of accessing social media; (2) access personal social media in the presence of the employer; or (3) divulge any personal social media.  Employees cannot be disciplined, terminated, or retaliated against for non-compliance if an employer makes such a request.     

Some state laws provide a narrow exception for employers to conduct legitimate checks of an employee’s personal social media accounts during a formal investigation of an employee’s alleged misconduct.  Nevertheless, securities regulators and financial firms would rather get in front of the issue and monitor employee’s conduct before it rises to the level of a formal investigation or before the potential harm to investors has been done. 

Securities regulators believe current employee-privacy laws are at odds with existing rules that require financial firms to monitor any investment advice that is posted or tweeted by employees.  Financial firms have found themselves between a rock and a hard place when it comes to the issue of employee privacy and compliance with regulations and will likely be faced with deciding whether to violate state law or SEC and FINRA regulations.    

Courts have yet to decide whether FINRA rules will supersede state law on this matter.

For further guidance on how financial firms can work within the bounds of state laws while maintaining its obligations to FINRA contact the experienced attorneys at Cosgrove Law Group, LLC. 

TWEETING, POSTING, and FRIENDING: Social media’s two-edged sword for Investment Advisers

Regulators and compliance departments alike have been shaking their heads at the potential pitfalls of social media. How to support and allow Investment Adviser’s to use social media tools and still protect the investor from bad actors and misinterpreted posts or tweets is no easy task. The rapid fire tweets and the “share everything” mentality become permanent, potentially discoverable, records. But Investment Advisers are finding that social media provides valuable avenues never before available to share and gain information, to find new clients, and to better understand existing clientele.

This week, the Wall Street Journal had an article on this very subject. While little official guidance has been provided to Registered Investment Adviser firms on proper social media policies, reviewing the current guidelines for client communication can offer guidance to compliance and legal departments when they are requested to develop a road map for their firm and its social media policies. The potential pitfall in having a detailed policy is that once it is in black and white, it must be followed, and either an individual or a department must be charged with ensuring this—quite a task for a such a vast medium. However, given the free-range but permanent aspects of social media, RIA’s of all sizes should begin discussing and seeking legal counsel on how they will address this matter given the current regulations in place that govern client and potential client communications. The alternative--waiting for a post or a tweet to cause a problem--can be a dangerous course to take.

Additionally, many employees may appreciate the guidance and opportunity to hear and be heard on this matter as they try to use social media to the best use without exposing their record or license to unnecessary risk. Part of being in a highly regulated industry is staying ahead of the curve so that potential problems don’t become actual ones.

FINRA has provided Broker Dealers with specific guidelines regarding social media. Using these rules as a framework for RIA’s social media policies may be another helpful tool when the RIA firm is looking for a place to start the discussion on this topic.

Cosgrove Law, LLC offers consulting to RIA firms on a wide range of compliance matters.