IA brief: State regulator’s deficiency letter offers clues for social-media policies

May 25, 2012

By Jason Wallace

NEW YORK, May 25 (Thomson Reuters Accelus) – A state regulator’s letter to an investment advisory firm outlining shortcomings in the firm’s use of social media also gives an early clue to how regulators will scrutinize the financial industry’s growing use of services like Facebook and LinkedIn.

The “exam deficiency” letter was provided by a source familiar with the case to Thomson Reuters on the grounds that neither the source nor the target of the letter be identified. Such letters, which specify areas in which a firm’s regulatory compliance falls short, are issued by a regulator after an examination of a firm.In the letter obtained by Thomson Reuters, the state said the firm had failed to adequately train employees in using social media, to create and outline proper procedures for social media use, to monitor use via the firm’s third-party provider, and to recognize that a customer’s use of a “like” button on Facebook may be considered a testimonial.

Investment advisers are increasingly interested in utilizing social media to reach out to existing and prospective clients. A recent survey by the Massachusetts Securities Division found that 44 percent of the state’s advisers currently utilize at least one form of social media such as Facebook, LinkedIn, or Twitter, and more advisers are expected to use social media within the next year. The survey included 576 registered investment advisers located in the state.

The Securities and Exchange Commission’s release in January of a risk alert offering direction on the use and supervision of social media in early 2012 make the regulatory picture a bit clearer for advisers. This alert conveys the staff’s observations regarding social media use by investment advisers as identified during examinations of advisers. The regulatory guidance and the increased web presence of advisers has enabled the SEC and states to take a more defined stance during regulatory exams resulting in deficiencies related to social media, although there have been few actual examples of this will play out in practice.

The deficiency letter obtained by Thomson Reuters is among the first round of adviser exams to highlight social media deficiencies and can help fill in the blanks for firms trying to get a better handle on enforcers’ social-media priorities. Such letters are not made public by the regulators, and are normally treated confidentially by affected firms.

The findings listed are specific to one adviser but may apply to the Web practices of many advisers. The firm was actively using LinkedIn and Facebook and contracted with a vendor to monitor and archive social media. Although the deficiency letter was issued by a state regulator, its findings can be analyzed for guidance to the application of federal SEC policies. Individual findings quoted below are accompanied by commentary on how social media standards might be applied:

  • “The Adviser has failed to provide sufficient and appropriate training to employees, to include its investment adviser representatives (IARs) pertaining to LinkedIn and Facebook.”– The SEC suggests that firms establish a training program and consider certification of understanding through attestation. Consider the frequency of a firm’s training sessions as well due to social media applications changing at such a rapid pace.
  • “There is no evidence that the Adviser requires or documents prior approval of content”.– Certain information can be pre-approved, like that of profiles used for LinkedIn or Facebook, using a simple sign-off sheet or even blue ink can be the solution to evidence compliance and prior approval.
  • “Regarding the monitoring of the firms’ Facebook and LinkedIn sites. The Adviser should consider how frequently to monitor third-party archiving sites. The Adviser should take into account that many third-party sites may not provide the level of access needed by supervisors or compliance personnel”.– A program should be instituted when a third-party archiving site is contracted. The program should include limits that individuals have and the calendar for which monitoring takes place.
  • “The Adviser has failed to address in writing, procedures for reviewing the adviser’s fiduciary duties in setting social website content standards, particularly for content that contains investment recommendations, specifically the investment performance noted via Facebook”.– The SEC alert suggests that each adviser should consider establishing clear guidelines for the appropriate use of social media, standards for content and effective procedures for monitoring the social media sites used by the firm, its representatives or solicitors. This would be the foundation for the firm’s social media policy. Especially when investment performance is presented on a social networking site, as performance needs to conform to advertising standards before released and in most cases subject to prior approval.
  • “The Adviser has failed to address, in writing, parameters and training for prohibiting specific content or imposing other content restrictions for its investment adviser representatives to follow”.– This finding relates to the foundation of a firm’s social media policy. The adviser needs to include policies that are specific enough to give definite parameters for content and ensure that training is very specific to this topic as well. It never hurts to include role-playing or giving real world examples when conducting social media training sessions.
  • “Our staff asks the Adviser to please provide an explanation as to why it does not consider a “like” via the social networking site Facebook to be considered a testimonial. If such explanation cannot be provided, the Adviser shall be required to remove this functionality prior to further use”.
    — The SEC release addresses the “like” button which is a component of Facebook but the alert allows for other types of popular plug-ins like the “recommend” button on LinkedIn. The SEC stated that if the public is invited to “like” an adviser’s biography on a social media site, or uses other plug-ins that represent “an explicit or implicit statement of a client’s experience with the investment adviser or IAR,” this could be deemed a testimonial. Granted, whether a statement is a testimonial depends on all the facts and circumstances…nonetheless a strong warning from the SEC.

Exam deficiencies rise with social media use

“The rate of social media usage and exam deficiencies are increasing at a similar rate”, said Paul Cox, CEO of Business Compliance Partners, a San Diego-based compliance consulting firm. Cox said “at the current volume of social media deficiencies discovered during examinations creating new rules and issuing new guidance will be warranted and required in the future.”

In the meantime, social media is here to stay and whether a firm has embraced it now or in the near future, it is important to prepare or implementing an effective policy and training program and to draw lessons from others’ social- media missteps.

 (This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=”http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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