RIA Compliance Blog
The Securities and Exchange Commission (SEC) recently issued a National Examination Risk Alert to investment advisers discussing the use of social media. Social media is becoming more widely used as a means to communicate with investors, and advisers need to ensure they are meeting their compliance requirements. The purpose of the alert is to inform advisers of ways they can improve and maintain sufficient compliance practices in using social media websites.
The SEC listed a number of issues for firms to consider as they evaluate the effectiveness of their compliance programs. Among all of the guidelines, some areas firms are encouraged to consider include:
- Whether they want to create usage guidelines to address which social media networks are appropriate for use and restrictions which may be appropriate for each network;
- Whether to create content standards to prohibit specific content or impose other restrictions in relation to their social media networks;
- How their compliance or supervisory personnel can adequately monitor the sites, and how frequently they should be monitored;
- Whether content must be pre-approved before posting to a site;
- Whether there are adequate resources dedicated to monitor the activity adequately on the social media sites;
- Developing criteria for allowing participation by third parties ;
- Implementing training related to social media-related compliance practices;
- Whether certification should be required to ensure that those individuals using the social media sites understand and are complying with the firm’s internal policies;
- Whether to adopt policies distinguishing between personal and professional sites, possibly specifying the types of communication about the firm which are acceptable on a site not maintained by the firm; and
- How to maintain information security.
One issue that has arisen is whether or not third parties should have the ability to post items to the site. In relation to third parties, the firm has to address whether the third party has the ability to post testimonials and comments. The firm should develop reasonable safeguards to ensure there are no violations of securities laws, as well as ensure it has the ability to remove posted material.
Investment advisers must also keep in mind that recordkeeping requirements do not differ for various types of media. It is important for firms to review their document retention policies to ensure that they are keeping records of all communications on their social media sites to maintain compliance with securities regulations.
Last year, Morgan Stanley decided to allow its advisers to use social media tools which made it the first large financial management firm to do so. The biggest issue for firms allowing their advisers to use social media is that they still have to comply with regulations to review and retain all communications with clients. Previously, technology was not advanced enough to deal with the unique features of social media, but the required software has been developed by several companies.
Morgan Stanley has imposed many restrictions on advisers in their use of social media. For example, advisers can only tweet messages from a library of canned tweets, which restricts the content that can be released on the site. Nevertheless, it is reported that some advisers like these restrictions, saying that it removes the pressure from them to comply with regulations. In the event that these advisers want to tweet their own message, they report that they can usually have them reviewed within a day.
Even though social media outlets make it easier for investment advisers to communicate with clients and potential clients, they must be aware of the potential risks. It is important that advisers create and maintain sufficient practices to prevent securities violations. This requires constant monitoring of sites as well as safeguards put in place to address issues that may arise.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.