INVESTMENT ADVISER LAW BLOG

Growing numbers of investment advisers and fund managers are using social media–Facebook, LinkedIn, Twitter, blogs, etc. After passage of the JOBS Act–and removal of the ban on general solicitation–we expect even more widespread use of these outlets to reach new markets and clients.

Advisers and private fund managers should recognize that these new forms of communication remain under the same antifraud, compliance, and recordkeeping requirements as traditional forms of advertising and communications. The SEC has already charged one adviser with fraud arising from offering fictitious securities through social media sites.

In recognition of the growing role of social media use by advisers, SEC staff has provided guidance for advisers when reviewing their compliance programs to address social media use.

Following is a selection of the some of the issues and concerns that advisers and fund managers should address as they (or their personnel) incorporate social media into their practices:

• Content Guidelines: Depending on the nature of an adviser’s or fund manager’s business, restrictions on types of information may be appropriate–investment recommendations, firm performance data, and the like can create compliance issues under the advertising rules. Firms should adopt clear guidelines with respect to such content.
• Monitoring: Firms should consider how best to effectively monitor social media use by their personnel. Depending on the size of the firm and its resources, only periodic spot checks or sampling may be appropriate while other firms may require pre-approval of content rather than after the fact review.
• Training: All firms using social media should implement procedures to educate their personnel of the potential compliance and securities law risks involved in social media communications.
• Enterprise Wide Sites: If the firm itself is using social media on behalf the enterprise, the firm’s policies and procedures should reflect incorporate social media as within the existing advertising-related guidelines. As one example, advisers are prohibited from the use of client testimonials in advertising. SEC staff believes that the use of the “like” button on an adviser’s Facebook account could be considered an improper testimonial if it reflects a client’s statement of its experience with the adviser.
• Recordkeeping: The electronic nature of social media communications does not change an adviser’s recordkeeping obligations. Many social media communications–client communications, recommendations or advice–will fall within existing categories of records that must be kept for at least five years. Advisers should develop procedures to incorporate these communications within their existing recordkeeping programs.

Social media opens new avenues for advisers and fund managers to communicate with existing clients and expand their reach to new markets and prospects. The novel nature of these communications does not, however, remove them from regulatory oversight. SEC staff has already identified advisers’ use of social media as an area of interest. Advisers using social media should take steps now to tailor their policies and procedures to ensure compliance with their existing antifraud, compliance, and recordkeeping requirements.

Sources:

• OCIE Risk Alert: Investment Adviser Use of Social Media
• SEC Charges Adviser in Social Media Scam
• SEC Investor Alert: Social Media and Investing — Avoiding Fraud

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Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433.

Tagged: Compliance, Investment Adviser, SEC

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