Social Media and Investment Advisers

Social media has dramatically changed the way people communicate. It has converted the traditional two-party private exchange into an interactive, multi-party dialogue open and accessible often to a multitude of third parties. It has also changed the static nature of one-way content exchange in mediums like websites to active exchanges where content can be freely created, exchanged and sometimes altered.

The popularity of social media itself is changing equally dramatically. Internet users visit social media sites more than any other internet sites. In just one year—2011 to 2012—the total time spent on social media sites in the United States by PC and mobile device users increased by 37 percent.

Antiquated Rules

The social media revolution has of course not gone unnoticed by businesses. Many businesses today actively and sometimes aggressively utilize such social media mechanisms as blogs, Facebook, Twitter and LinkedIn to extol the virtues of their services and products. As tempting as the broad and new market places offered by social media are, however, certain government-regulated businesses like investment advisors must proceed with caution.

Unfortunately, neither the SEC nor FINRA has reacted to social media usage as quickly as social media has burgeoned. In January 2010 and August 2011, the SEC issued some guidance to broker-dealers, and in January 2012 it also issued an Alert for Investment Advisers. Although the SEC’s Office of Compliance Inspections and Examinations attempted to provide some guidance for investment advisers, that guidance to date has been very limited.

The same is true of those attempting to extrapolate on the SEC’s alerts. Most non-government publications available so far to those seeking deeper guidance do little more than reiterate the SEC’s suggestions and cautions.

About all that is clear now on the use of social media by investment advisers is that while using social media is not prohibited, the use of social media is subject to federal securities laws and applicable FINRA rules, and investment advisers who want to make use of social media should proceed with caution and as much knowledge as possible.

Applying what may be antiquated rules to a new technology is fraught with pitfalls. Nevertheless, the SEC’s suitability, privacy and communicating with the public requirements and rules still apply. The record-keeping requirements of the 1934 act, as well as FINRA rules remain in play as well, along with the obligation of supervisors to take reasonable steps to ensure compliance.

Third-Party Dangers

Among the many dangers and obstacles lurking for investment advisers using social media is what is often referred to as third-party content. Third-party content happens in social media when a third party posts on the adviser’s site.

One of the dangers third-party content presents for advisers is that a third party’s post could possibly be considered a testimonial prohibited by Rule 206(4)-1 of the Investment Advisers Act. Although not defined by the Advisers Act, a testimonial is interpreted generally to include a client’s experience with, or endorsement of, an investment adviser. More specifically, an unlawful testimonial may occur, even unwittingly, when, in the context of Facebook for example, a third party “likes” an adviser’s post or site. The use of a “like” button may constitute an endorsement of the adviser. Testimonials, though, typically refer only to statements of “clients,” so there may not be an issue if the third party is not a client. Appropriate disclaimers on the site may help too.

Many investment advisers have steered away from Facebook and instead use LinkedIn. Historically, LinkedIn has allowed the user to disable or hide the site’s “recommend” feature. An adviser can thus essentially preclude problematic testimonials by limiting third-party use of the site. If a third party cannot “recommend” or “like” the adviser, the risk of a prohibited testimonial is reduced.

Investment advisers currently using LinkedIn, however, should be wary. Recently, LinkedIn has either experienced what appears to be a programming glitch, or has changed its programming. The cause of the change seems to vary depending who in customer service responds to an inquiry. Regardless of the cause, a LinkedIn user’s ability to hide the site’s “recommend” feature is currently no more. Investment adviser users of LinkedIn can no longer protect themselves from prohibited testimonials.

According to one LinkedIn customer service representative, this is a known glitch and efforts are underway to fix the issue. According to another customer service representative, there “is no option to remove” the “recommend” function. A user, however, can either hide or remove endorsements. If an investment adviser has to hide or remove a testimonial though, that means the testimonial was already posted and may subject the user to regulatory scrutiny. Prohibited testimonials are thus now a risk for advisers using LinkedIn, similar to other social media sites. Compliance and supervisory personnel should take note.

The existing regulatory scheme was adopted prior to the existence of social media, and the abilities of social media continue to change rapidly. Competent professional advice in this area is a must.