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Six: Managing Social Media Compliantly

What Are the Investor-Protection Rules as They Relate to Social Media?

Regulators are responsible for overseeing the welfare of investors. That covers a broad range of issues, and increasingly the use of social media by financial professionals is coming under scrutiny. In June 2013, for example, the Financial Industry Regulatory Authority (FINRA) issued a so-called targeted examination letter (also known as a sweep letter) to a number of broker/dealers (see Figure 31.1). Among other things, the agency was seeking:

■ Explanations of how the firm and its brokers are using social media (specifically Facebook, LinkedIn, Twitter, and blogs) in the conduct of its business.

■ The firm's written supervisory procedures concerning production, approval, and distribution of social media posts and other types of engagement.

■ An accounting of how the firm oversees internal compliance with its social media policies.

Some of the requests were extremely specific. FINRA, for example, wanted a list of the top 20 producing representatives who used social media for business purposes to interact with retail investors between February 4 and May 4 of that year. (“Please identify the type of social media used by each individual for business purposes during this time period. Please include the individual's full name and CRD number as well as the dollar amount of sales made and commissions earned during the period.”)

FINRA's Letter to Broker/Dealers on Social Media Practices

FIGURE 31.1 FINRA's Letter to Broker/Dealers on Social Media Practices


It's much the same on the Securities and Exchange Commission (SEC) side of the regulatory universe. When SEC examiners review how financial advisors are using social media, they do so through the prism of the fundamental protections for investors. These are outlined in the Investment Advisers Act of 1940, which establishes that advisors who fall under the act's jurisdiction owe a fiduciary responsibility to their clients. This means acting in good faith, providing full and fair disclosure of all material facts, and providing material care to avoid misleading clients.

In practice, that means advisors need to offer the following:

■ Disinterested and impartial advice. Clients should be assured that their advisors are recommending products and services with which the advisors have an arm's-length relationship.

■ Recommendations that are suitable to the client's needs. For example, investors of advanced age often are poorly served by many annuity products, given that they may not live long enough to enjoy the products' full financial benefits.

■ A high degree of care in ensuring that adequate and accurate representations and other information are presented to clients.

■ A reasonable basis in fact for their representations.

To the extent that you establish an investment advisor relationship through social media or other means of interaction, federal rules of due care come into play. Social media can help start a conversation with a potential client, but regulators don't see the legal guidelines come into play until the advisor offers specific advice to a client and is paid for doing so. On the other hand, if you say, “People over 60 should consider tax-free income, and here's why, and here's our latest report on options for planning tax free income,” that's "of investment advice because it's a thesis that doesn't relate to an individual.

Federal rules generally bar advisors from sitting on both sides of a transaction; you can't be an advisor where you're selling a security from one client to another, or where you're buying it from one client and selling to another client. The general rule is to require disclosure in these situations, so the clients give consent. Social media isn't likely to be a place where you effect transactions; there are electronic venues for trading that serve that purpose. But social media sometimes can be used by regulators for oversight purposes because advisors leave footprints in the social media world – you can see if someone is offering advice that's biased or unsuitable.

The SEC also generally prohibits advisors from charging performance fees except if the clients are relatively wealthy and can afford to negotiate for themselves. (They are typically people with SI million to invest.) Again, social media can be used to identify clients interested in a performance fee structure and ready to start relationships, but by the time an investor is ready to commit funds to an advisor, those transactions move off the social platform and into more secure electronic environments. It's not unlike how client servicing is working in other realms of social media – people engage on Twitter, for example, then move to direct messages or telephones for more private conversations.

Financial professionals who are using social media, of course, need to keep these points topmost in their minds, as they would if they were using older forms of communication. Like FINR A, the SEC has posted guidance for financial professionals who are looking to use social media in their business. And like FINRA, the SEC is looking at advisor activity on social media with an eye on investor protection.

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