A new SEC alert gives updated guidance regarding the pitfalls of using social media

January 23, 2012 — 4:40 PM UTC by Guest Columnist Les Abromovitz


I was reading an article and wanted to print it. Aside from printing or bookmarking the article, I was given the option of e-mailing or G-mailing it. I was also given the opportunity to post the article to Facebook or Twitter. In addition, I could have added it to Tumblr.

Although I’m technologically challenged and decided to print the article, some investment adviser representatives might have made a different choice and caused themselves a compliance problem. IARs need to take a breath and think about the compliance consequences before using social media for business purposes. See: Early adopters of social media, RIAs are growing disenchanted with its power to drum up new business.

At a minimum, IARs should be checking their firms’ policies and procedures. Depending upon the nature of the article and with whom the IAR is communicating, there must be compliance with the registered investment adviser’s policies and procedures relating to advertising, client communications, electronic communications and/or social media. There must also be compliance with records retention requirements.

Know your firm’s policies and procedures before you post on social media sites

Assuming an article has nothing to do with investing or the IAR’s advisory firm, there is little risk when it is posted on a personal social media site like Facebook. See: Why compliance experts are apt to dislike Facebook.

If the article is related to investing or the IAR’s advisory business, however, the danger is that the personal social media site is now being used for business purposes. That’s a problem if the RIA’s policies and procedures prohibit the business use of social media.

Different issues arise if the RIA’s policies and procedures do allow IARs to use certain forms of social media for business purposes. If social media is an advertisement, it usually requires the RIA’s compliance officer to pre-approve posts. Furthermore, RIAs must be able to retain all posts in accordance with their firms’ books and records policies and make them available for inspection by securities examiners.

SEC finally issues guidance on social media

To avoid compliance problems, RIAs should become familiar with the SEC’s recent guidance related to the use of social media. The SEC’s National Compliance Risk Alert, Investment Adviser Use of Social Media, was published on Jan. 4. See: SEC sends sharp warning to advisors using social media.

The publication is based on observations made by compliance examiners during examinations of RIAs. State-registered RIAs will also benefit by paying attention to the guidance in the Risk Alert. See: Social media: There’s a bigger mistake you could make than offending the SEC.

The SEC’s Risk Alert observed that while many RIAs have policies and procedures in place governing advertisements, client communications and electronic communications, they might not have a separate and specific social media policy. The SEC found that RIAs’ policies and procedures often do not address whether social networking is permitted for business purposes or specify the restrictions on using it.

Among other recommendations in the Risk Alert, the SEC urged RIAs to implement social media usage guidelines and content standards. The Risk Alert also advised RIAs to consider establishing criteria for approving the use of a particular social media site, such as a blog. As part of this process, RIAs should consider a number of factors such as the site’s:

• Advertising practices … Advertising practices that can raise the hackles of regulators.
• Privacy policy
• Ability to remove third-party posts
• Controls on anonymous posts.

In addition, the SEC’s Risk Alert addressed the issue of testimonials in the context of social media.

Watch out for third-party content that gives a testimonial for the adviser

RIAs that permit third-party posts on their social media sites should consider having policies and procedures to prevent the posting of testimonials about the firm or its IARs. Although the word “testimonial” is not defined in Rule 206(4)-1 under the Investment Advisers Act, it has been interpreted to be a statement of a client’s experience with, or endorsement of, an RIA. Depending upon the circumstances, the use of “social plug-ins,” such as the “like” feature, might be viewed by examiners as a testimonial. The Risk Alert cited the example of an IAR inviting the public to “like” the representative’s profile posted on a social media site. Applying that guidance to an IAR’s decision to post an article, it might prompt a “like” or a comment that could be viewed by securities regulators as a testimonial. See: Three ways to use social media in turbulent markets.

In a footnote, the SEC’s Risk Alert stated that some social media sites do not permit RIAs to disable the “like” feature or a similar mechanism. In those instances, the SEC encouraged RIAs to develop a system to monitor and, if necessary, remove the third-party postings.

With all that said, I’m going back to that article I was reading. It might be finished printing by now.

The Risk Alert can be found at: http://www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf.

Les Abromovitz is a senior consultant with National Compliance Services, Inc., Inc. Les, an attorney, is the author of “Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide.” His new book, “The Investment Advisor’s Compliance Guide,” will be published in 2012. Les can be reached at 561-330-7645, Ext. 213 or at LAbromovitz@ncsonline.com.

Mentioned in this article:

NCS Regulatory Compliance
Consulting Firm
Top Executive: Mark Alcaide, COO/Partner

Share your thoughts and opinions with the author or other readers.


Mike Byrnes said:

January 24, 2012 — 5:02 PM UTC

Thinking about sharing an article before it goes out to your network of connections is nothing new.

Advisors should use common sense when using social networks, or any marketing tool for that matter.

Social media has many benefits that should not be overlooked! Read my 2010 RIABiz article called “Seven things advisors need to know about social media” that still holds true: http://www.riabiz.com/a/1192012

Mike Byrnes, President of Byrnes Consulting, LLC


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