4 MIN READ
From a compliance standpoint, the financial services industry started with the Securities Exchange Acts of 1933 and 1934. The Act of 1933 primarily dealt with the issuance and registration of securities, and the Act of 1934 was focused on trading of securities in the secondary market or on exchanges.
What was going on in 1934?
The great depression.
As a result of the Great Depression, the government created protectionist policies and changes surrounding all aspects of the US economy. There was a thorough evaluation of government spending, tax policy, trade tariffs and of course, securities registration and trading practices.
Immediately after the Great Depression, the Investment Advisers Act of 1940 was created to monitor and regulate the activity of Investment Advisers. The Act Introduced the Investment Adviser Registration requirements, and a vast majority of the regulations that we adhere to today.
In addition, the Act of 1940 established the definition of investment adviser—most basically referring to anyone who provides advice or makes a recommendation on securities.
This regulation is the reason for your favorite document: your ADV!
That’s right. Regulations that were created 80 years ago are the reason firms must fulfill the annual ADV update requirement.
Here are a few key points for understanding social media compliance.
Discussion on SEC 206(4)-1
Testimonials. While Rule 206(4)-1 does not specifically define the term "testimonial", it generally includes any favorable statement made by a current or former advisory or financial planning client.
Recommendations. Per the regulations mostly refer to past performance, but there is immediately following this section in the Act, discussion on suitability of client recommendations. As a result, for most firms, a “no recommendations” policy across the board makes the most sense.
Adequate Disclosure of Limitations. Firms should refrain from representing that any graph, chart, formula, or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities without adequate disclosure of limitations.
Use of the Term “Free”. Firms should refrain from representing that any report, analysis, or other service will be provided without charge unless the report, analysis, or other service will be provided without any obligation whatsoever.
Performance Advertising. Advisers are permitted to advertise past performance, but with enhanced compliance obligations and disclosures.
Social Media Description and Definition. Social media includes the use of many technologies, including but not limited to blogs, microblogs, wikis, photos and video sharing, podcasts, and social networking sites.
When evaluating the landscape shift from dated advertising mediums such as newspaper ads to social media outlets, it is important to understand the conversion away from “Adviser to client” communications and towards an interactive platform where advisers, clients, prospects, third party vendors, and the general public all have equal access to create and disseminate content.
Regulators are reacting to the fact that with social media, we all have the tools needed to communicate with the public at the click of a finger. This brings about the issue of regulatory accountability. When the adviser controls the content, the adviser can be easily held accountable for the content that is produced. Social media takes control of the content away from the adviser, expanding the need for supervisory policies and procedures.
Social Media Policy
Every firm that utilizes social media for marketing and advertising should adopt a formal social media policy. The best way to be specific in social media policy is to focus on definitions of terms used within the policy, and to explicitly name platforms and features to be used within those platforms.
An effective social media policy will include guidelines for use, including what can and can’t be communicated on personal and professional networking sites. In addition, the social media policy should include supervisory processes that identify the personnel responsible for monitoring compliance with the policy, and the frequency of review. The frequency of review can be evaluated via two primary methods.
Real-time vs. Periodic Monitoring
Firms have some flexibility on frequency of review based on the nature of the content and the internal review process that is in place. For one-person firms, assuming you are the only person who posts content, your review will by nature be considered ”real-time”.
This assumes you review the content prior to posting it by nature of having created it. However, I would encourage firms not to rely solely on this assumption and to instead create some internal “pre-review” process that documents the real-time review process.
SEC commentary states that periodic monitoring does not meet the standard of adequate supervision if volatile content is rapidly and broadly disseminated. In other words, a quarterly review is useless if the review occurs days or weeks after a violation has occurred.
Am I allowed to click “like”?
This is a gray area. The term “testimonial” is not defined in Rule 206(4)-1(a)(1), but SEC staff consistently interprets that term to include an intrinsic, or extrinsic statement of a client's experience with, or endorsement of, an investment adviser.
Therefore, depending on the facts and circumstances, the use of “social plug-ins” such as the “like” button could be a testimonial under the Advisers Act. Third-party use of the “like” feature on an investment adviser’s social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client's or clients' experience with an investment adviser or IAR.
I predict the social media landscape will continue to evolve at a speed that far exceeds the pace at which regulatory guidelines and examination practices will be able to keep up. New platforms, changes in existing platforms, and changes in privacy regulations at the federal and legislative levels will all play a factor in this evolving landscape.
Don’t lose sleep over it. Simply maintain awareness of regulatory guidelines, draft a social media policy that checks off the boxes, and execute ongoing review and monitoring of social media activity.
About the Author
Scott is a formerly licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC. Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting in Charlotte, NC. He’s a graduate of The University of North Carolina at Chapel Hill and formerly held FINRA Series 7, 63, 65, 24, 4 and 53 Licenses. Scott lives in Charlotte, NC with his wife Meredith, and their two sons Tyson and Jackson and daughter Eva. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.