By Joshua Horn
With the explosion in the use of social media by investment advisors, compliance departments have faced a Herculean task to stay on top of its use. The ways in which social media can be used is only limited by an individual's creativity. Considering the tremendous upswing in the use of social media, the SEC recently issued a National Examination Alert to provide registered investment advisers with guidance in this burgeoning area.
In accordance with Rule 206(4)-7, firms that use social media need to adopt and periodically review the effectiveness of policies and procedures regarding the use of social media. The SEC recently identified RIAs of varying sizes that are using social media to assess whether they are complying with securities laws. A key failing that the SEC found with current policies and procedures is that the social media policy overlaps with other policies, rather than being unique in their own right. The lack of clarity of compliance policies that apply exclusively to social media can only lead to confusion over what polices apply.
In order to provide guidance, the SEC proffered a number of factors for firms to consider when developing and implementing social media polices and procedures. These factors include: usage guidelines where firms can list approved sites; content standards or pre-approval of content; monitoring and frequency of monitoring; has the firm committed enough resources to social media; enumerating criteria to approve participation; training that promotes compliance and prevents violations; certification of understanding policies as a condition to a investment advisor using social media; functionalities of social media sites; the use of personal sites by advisors; information security; and enterprise wide sites.
With all of these factors in mind, what should a firm do? Depending upon your size and nature of use of social media, it may be advisable to have an individual or individuals specifically assigned to monitor and implement your social media policies. The use of social media changes on a daily basis. The only way to stay compliant is to have flexible polices that change with the times with personnel designated to ensure full compliance.
Another problem that firms face is if they allow third-parties to place content on their social media sites. The risk with allowing third-party posts is that those posts, however innocuous they may appear, may actually constitute a testimonial in violation of Rule 206(4)-1(a)(1). To avoid this conundrum, it may be wise to prevent third-party postings to your social media sites.
A final consideration that the SEC offered was the recordkeeping that firms must employ if they communicate through the use of social media. If your firm deploys social media as a means to communicate with the public, then you should review your record keeping policies to ensure that you are retaining social media in conformance with the law.
While social media can have a huge upside for the expansion of business, it is also wrought with issues. A compliance staff dedicated to focus on social media only is one way to stay in front of the regulatory morass that the use of social media may cause. Equally important, you must make sure your policies and procedures on social media are consistent with the manner in which your firm is using social media. With these considerations in mind, you should be able to enjoy the use of social media and be compliant at the same time.
(Joshua Horn is a partner and co-chair of the Securities Industry Practice at Fox Rothschild in Philadelphia).