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Investment Advisers Fear Factor Spikes Amid SEC Social Media Sweep

February 17, 2011
Related Topics: Internet, Latest News

Two financial regulatory organizations are taking a closer look at how advisers use social networking.

Last month, the Security and Exchange Commission began a sweep of advisers’ use of social media and social networking, according to executives at compliance vendors who have seen an SEC letter requesting information from advisers or have clients who have received it. Meanwhile, the Social Networking Task Force Financial Industry Regulatory Authority Inc., also known as Finra, is meeting next month to discuss whether it needs to update its guidance on how advisers should use social-networking sites, spokeswoman Nancy Condon said.

Both moves come a little more than a year after Finra issued its first regulatory guidance on how brokers should use social media. Although advisers said that notice was helpful, they are still wary of delving into social networking until regulators come up with more specific clarifications of what is allowed.

“I’d love to start tweeting to the general public once they can clearly tell me what I can and can’t do,” said Doug Flynn, an adviser at Flynn Zito Capital Management, which has $275 million in assets under management. “However, putting yourself out there too much without specific guidelines is just not worth the risk.”

The SEC has asked advisers for documentation as to how they use social media sites such as Facebook, Flickr, LinkedIn, Twitter and YouTube, among others—as well as blogs—according to the letter, which was obtained by Workforce Management sister publication InvestmentNews. The SEC also is asking for information about advisers’ policies that govern how their employees use social media, according to the letter.
John Nester, an SEC spokesman, declined to comment.

The SEC’s sweep is focused on making sure that advisers aren’t using these sites to promise investor returns or engage in other illicit activities, said Adelbert Sanchez, a senior principal consultant at ACA Compliance Group. A couple of ACA’s investment adviser clients have received these letters from the SEC.

“Given the SEC’s budget crunch, this is an easy sweep they can do from their own desks,” Sanchez said. “All they need to do is log on to Facebook and search for the names of unregistered funds.”

Finra’s guidance on advisers’ use of social networking was helpful, but the regulator realizes that it can do more to clarify its position, said Chad Bockius, chief executive of Socialware Inc., a provider of social media compliance software. He has spoken to officials at Finra about the matter.

“It’s been a year, and a lot of firms have taken steps to adopt social media for business purposes, and so Finra wants to see where there are areas that need more clarification,” he said.

One area that many advisers have questions about is what constitutes personal vs. professional use of social media, Bockius said. Also, advisers would welcome some explanation as to how Finra’s guidance, which essentially states that marketing services through social media is advertising, applies to different types of social networking sites such as LinkedIn, he said.

For example, advisers want to know if their LinkedIn profiles need to be re-approved by their compliance departments, because they could be construed as marketing, Bockius said.

“Finra didn’t talk about LinkedIn groups,” Bockius said. “There was no way they could go over every aspect of every social media network.”

Despite the fact that both agencies are taking a closer look at social media, some lawyers doubt that the SEC will come out with rules on the issue, given everything else that they have on their plate.

“I’d be shocked if we saw any actual rulemaking based on this,” said Daniel Bernstein, a lawyer and the director of professional services with the compliance consulting firm MarketCounsel. “I think we will see some rule-making through deficiency letters.”

But given the prevalence of social media these days, the SEC may feel more pressure to come out with rules, said Catherine Botticelli, a partner at Dechert.

“I think they are trying to get the lay of the land, but it’s likely some rule-making will come out of this,” she said.

And rules are likely to put a hardship on firms with regard to record-keeping, Botticelli said.

“It’s not just e-mails,” she said.

“If you are conversing with a customer or a broker at another firm on one of these media outlets, depending upon the content you may be required to maintain those records. If that is the case, firms will need to have the infrastructure in place to do that,” Botticelli said.  

Filed by Jessica Toonkel and Davis Janowski of InvestmentNews, a sister publication of Workforce Management. To comment, e-mail


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