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What Does the SEC Say about Social Media?

The Investment Advisers Act of 1940 obviously predates the arrival of the Internet and social media. The leading communication technology of the time was the postal service and telephones, and most of the law's rules were written to address them accordingly. (Perhaps anticipating further developments in communication, the government broadened the rules somewhat to include “any means or instrumentality of interstate commerce, directly or indirectly” – leaving the door open for fresh-in technology.)

Indeed, when the U.S. Securities and Exchange Commission rolled out new guidance in January 2012[1] concerning compliance and social media, it observed that the use of social media in the financial advisory industry was fundamentally altering the business, and at an accelerating pace.

“Social media is landscape-shifting,” the SEC said. “It converts the traditional two-party, adviser-to-client communication into an interactive, multi-party dialogue among advisers, clients, and prospects, within an open architecture accessible to third-party observers. It also converts a static medium, such as a website, where viewers passively receive content, into a medium where users actively create content.”

SEVEN NEW GUIDELINES THAT CCOs SHOULD KNOW

Toward that end, the SEC provided advisors with a broad range of things to consider for compliance purposes as they integrated social media into their practices. They include:

Usage Guidelines – Firms, the SEC said, may consider ground rules for how its investment advisor reps and solicitors could use social media – outlining a series of approved social media networking sites, for example, or barring particular functions on a specific site.

Content Standards – Firms should think about what risks, if any, its content on social media poses to its fiduciary duty or other compliance matters. Does content recommend certain investments or services? Does it offer information on investment performances? Clear guidelines may be needed on whether to restrict certain content.

Monitoring of Social Media Use – Firms should consider their own social media sites as well as those of any third-party sites it uses. The frequency of monitoring – intermittently? every day? real time? – depends on the firm's own assessment of its risks in this area. How often do advisors post content? What are the risks of misleading content? After-the-fact reviews of content that breaks the rules may be unreasonable, the SEC believes, given the broad reach that such content has with investors.

Resources – Has the firm committed enough to meet its compliance needs? Regulators expect the level of resources to be commensurate with social media activity – in other words, the more engaged you are on LinkedIn or Facebook, the more resources regulators will expect you to have in place to support that engagement. If a firm's social media involvement is large enough, bringing in an outside vendor to oversee social media use by its reps may make sense.

Training and Certification – Firms may consider setting up appropriate social media instruction, as well as the means of ensuring that their reps and solicitors understand their policies.

SEC on Social Media

FIGURE 9.1 SEC on Social Media

Functionality – Firms need to consider whether the social media sites they approve for use by their advisors are staying current with industry standards. For example, does a site have a function that endangers a client's privacy and lacks a means of disabling or modifying such a function? Rapid tech evolution makes this consideration especially significant, the SEC says.

Personal/Professional Sites – Firms should consider whether its advisors should conduct business on personal or third-party social media sites. They also should evaluate whether access to such sites poses security risks. See Figure 9.1.

  • [1] SEC Office of Compliance Inspections and Examinations, “Investment Adviser Use of Social Media,” National Examination Risk Alert, January 4, 2012, sec.gov/about/offices/ocie/riskalert-socialmedia.pdf.
 
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