Just as more professionals have started taking advantage of social media to develop and grow their business, the financial services industry is following suit.  However, given the highly regulated nature of this industry, financial services professionals must be aware of special regulatory considerations when utilizing social networking tools.  The SEC has now weighed in with its own cautionary tale.

On January 4, 2012, the Office of Compliance Inspections and Examinations of the U.S. Securities and Exchange Commission ("SEC") issued a National Examination Risk Alert that was related to an investment adviser’s use of social media.  The SEC noted that investment advisers are increasingly using social media to communicate with existing and potential clients, promote services, educate investors and recruit new employees.  Such communications, the SEC cautioned, must comply with federal securities laws.  As a result, investment advisers should adopt and review their compliance policies concerning the use of social media.

The SEC cautioned investment advisers that allowing third parties to post content on their social media site may run afoul of the federal securities laws.  For example, the SEC identified the issue of testimonials.  Rule 206(4)-1(a)(1) under the Advisers Act precludes publishing or distributing advertisements that directly or indirectly refer to testimonials concerning an investment adviser.  The SEC also noted that though the term "testimonial" is not specifically defined in Rule 206(4)-1(a)(1), the "SEC staff [has] consistently interpret[ed] that term to include a statement of a client's experience with, or endorsement of, an investment adviser."  As a result, the SEC stated that the use of "social plug-ins," such as the "like" button, could be a prohibited testimonial under the Advisers Act.

The recordkeeping responsibilities of investment advisers are also within the scope of the SEC’s recent guidance on the use of social media.  Rule 204-2 under the Advisers Act requires investment advisers to maintain certain books and records relating to their advisory business and to keep such records for a specified period of time.  The SEC noted that the recordkeeping obligation of the Advisers Act does not differentiate between various types of media.  An investment adviser is required to retain social media communications if the communications contain information that satisfies an investment adviser's recordkeeping obligations under the Advisers Act.  Therefore, the SEC recommended that firms and advisers review record retention policies to ensure compliance with the recordkeeping obligations of Rule 204-2.  The SEC also suggested that firms may want to conduct periodic testing using word searches to determine whether employees are complying with record retention policies.

The SEC has defined social media broadly and expressed concern that existing compliance policies may not be specifically tailored to social media and may not make it clear which standards apply.  The SEC’s definition of social media is an umbrella term that encompasses various technologies including, but not limited to, blogs, microblogs, wikis, photos and video sharing, podcasts, social networking, and virtual worlds.  The SEC provided a "non-exhaustive" list of factors that compliance departments and investment advisers should consider when evaluating and implementing social media use policies.

Implementing Effective Compliance Procedures

Below are some of the factors the SEC identified to develop effective compliance procedures to address the use of social media by investment advisers:

Usage Guidelines and Functionality.  A firm may adopt guidelines concerning the appropriate and inappropriate use of social media.  An example guideline may include creating a list of approved social media sites. Then the firm can limit the functionality of these sites based on a risk analysis.

Content Standards.  A firm may want to provide clear guidelines with respect to content that contains investment recommendations or information concerning investment services.

Monitoring.  A firm should consider how to effectively monitor social media use and the frequency of such use.  If a firm uses a risk-based approach, it may conclude that periodic, daily or real-time monitoring of particular social media sites is appropriate.

Training and Certification.  A firm should consider implementing training on the proper use of social media.  A firm may also wish to require that its employees certify that they understand and are complying with the firm's social media policies and procedures.

Information Security.  A firm should consider reviewing its security procedures to ensure protection of the firm's computer systems due to the elevated risks relating to social media use.

Conclusion

The SEC's alert serves as a shot across the bow of investment advisers.  The SEC's broad definition of social media and specific examples of potential infractions provides a stark reminder that the SEC is serious about regulating investment advisers' use of social media as advertising.  Investment advisers have a responsibility to implement effective policies and to institute active monitoring of social media communications.

A copy of the National Examination Risk Alert is available at www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf.

© 2012 Perkins Coie LLP