Social Media Compliance forInvestment Advisers Bryan Hill, President October 13, 2011
Today’s PresenterBryan HillPresidentRIA Compliance Consultants, Inc.
Today’s Slides Download the slides by visiting the following webpage:www.RIA-Compliance-Consultants.com/socialmedia2011
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Definition of Advertisement SEC Rule 206(4)-1• Any notice, circular, letter or other written communication addressed to more than one person; or any notice or other announcement in any publication or by radio or television• Offering – Any analysis, report, publication concerning securities – Any graph, chart or formula regarding when or which security to buy/sell; or – Any other investment advisory services with regard to securities.
Examples of Advertisements• Communications Sent or Prepared for Current or Potential Client• Websites• Blogs• Newsletters• Radio and Television Advertisements• Billboards• Business Cards• Social Media Websites
Advertising Prohibitions• SEC Rule 206(4)-1 prohibits an investment adviser from advertising: – Any testimonial of any kind concerning the investment adviser; – Past specific investment recommendations (unless a list of all past recommendations past year); – Any graph, chart, formula to assist with a decision to buy or sell securities without proper prominent disclosures; – Services furnished free or without charge (unless entirely free and without obligation); and – Any untrue statement of material fact.• Recommend that these prohibitions be followed in non- advertising context, which is still subject to anti-fraud requirements of Section 206 of IAA ’40.
Past Recommendations• Past recommendations prohibited unless list of all recommendations made by the adviser within at least the prior one-year period.• Meant to stop “cherry picking” profitable recommendations.• Limited list of recommendations permitted if objective and not misleading: • Selection based on objective, non-performance criteria and consistently applied; • Cannot discuss realized or unrealized profits or losses; • Include cautionary disclosures; and • Adviser must maintain records regarding all recommendations and the selection criteria.
Other Common Advertising Issues• Promises, Guarantee & Untrue Statements Problems – Unable to prove and substantiate all claims. – Cannot cite source for a statement. – Use of promissory language. – Use of language that creates the perception of a guarantee. – Use of inflammatory language. – Inaccurate statement concerning number of clients, types of services, assets under management, and level of expertise, etc.• Do not use acronym “RIA”• Misleading Professional Designations• Performance Advertising – Should follow SEC’s Clover no-action letter
Client ReferencesMay include partial list of clients under followingconditions:• Adviser does not use performance-based date to determine which clients to include on the list;• Each list includes a disclaimer that “it is not known whether the listed clients approve or disapprove of adviser or the advisory services provided”; and• Each list includes disclosure about the objective criteria used to determine which clients were included on the list.
Third-Party Rankings, “Top Adviser” Lists, and Reprints• Adviser’s use of reports and articles prepared by third-parties need to be reviewed and approved as an advertisement prior to first use;• Regulators will hold advisor accountable for applying advertising rules to reports and articles prepared by third-parties;• Top adviser lists and other rankings primarily reflecting clients’ experiences with an adviser could be considered a testimonial and should not be reprinted by the adviser; and• Client opinions are okay as long as they are an insignificant factor in determining overall rating.
Social Media – SEC Sweep• Involvement in Social Media – Explanation of the adviser’s level of involvement with or usage of social media websites;• Communications – Communications sent or received by adviser on any social media website, including blog postings, messages, tweets;• Policies & Procedures – Adviser’s policies and procedures relating to the use of social media website;• Third Party’s Use of Social Media – Any communications posted by third parties on social media on behalf of adviser;• Non-Business Use – Adviser’s policies & procedures related to the use of social media by employees for non-business purposes;• Training – Adviser’s internal training & education to employees on the topic of both business-related and personal use of social media websites;• Disciplinary Actions – Any disciplinary action taken against an employee related to the employee’s use of social media websites; and• Record Retention – Record retention policies & procedures concerning involvement or usage of social media.
Social Media – SEC Guidance• To present, SEC has not issued any formal guidance regarding the use of social media & networking websites.• No SEC enforcement actions have been published on the topic of social media.• However, FINRA case filed in Jan 2011 & sanction published in July 2011 – Related to Twitter stock-picking messages that were “overly positive” and lacking disclosure of material information.
FINRA Regulatory Notice 10-06• Record Keeping – Must ensure retention records of communication via social media.• Suitability – All recommendations via social media site must meet be suitable for every investor to whom it is made.• Public Appearances – Interactive electronic forum (chat rooms & online seminars) doesn’t require pre-approval by principal but must be supervised.• Static Posting – Treated as advertisements under FINRA Rule 2210 & requires pre- approval.• Interactive – Doesn’t require pre-approval by principal but must be supervised to ensure no violations of FINRA communications rules.• Should adopt risk-based principles for supervising social media similar to those outlined for electronic correspondence (Regulatory Notice 07-59).• Must adopt policies & procedures to ensure appropriate supervision, necessary training and background and do not present risks to investors.• Must require only associated persons with appropriate training engage in social media.• Third-party posts generally not subject to pre-approval under Rule 2210. – However, attributable to b/d if involved in preparation or endorses/approves content.
FINRA Regulatory Notice 11-39• Recordkeeping – Retention depends upon whether business communication• Supervision: – Principal must review social media site (complete design) prior to business use by associated person. – Principal may approve if associated person can & will comply with all FINRA requirements, federal securities laws including recordkeeping and additional requirements of b/d.• Links to 3rd Party Sites – Can’t link to site that b/d knows, has reason to know, or has red flags indicating false or misleading content.• Data Feeds – Must adopt procedures to manage data feeds to b/d’s sites to avoid inaccurate data.
Recommendations & Best Practices• Written policies and procedures concerning use of social media.• Mandatory social media compliance training of all associated persons. – Do not allow or strictly scrutinize the use social media accounts by high risk, associated persons – previous sales practice violations.• Annual certification/attestation by associated persons of compliance with social media policies procedures.• Utilize electronic surveillance/archiving system to supervise social media communications and retain records.• If not subject to electronic surveillance/archiving system, manually review social media accounts of associated persons.• Require pre-approval of social media site prior to firm or rep’s usage.• Require pre-approval of static content and after-the-fact supervision of interactive communication. – Use dirty word lists to trigger reviews and sample interactive communication on regular basis• Keep true record for at least 5 years from last use. – Records must be easily accessible so can be produced during an audit. – For any dually registered b/d, records must be WORM compliant.
Recommendations & Best Practices• Monitor personal sites/accounts of reps• No testimonials: – Includes “service” testimonials. – Linkedin - Do not accept or show recommendations on an individual’s profile. – Facebook – No specific SEC guidance whether “Like” is a testimonial. • Conservative Approach – Do not permit use of “Like” button for corporate pages. • Disclosure Approach: Make full disclosure similar to the following: Clicking the “Like” button does not constitute and should not be considered a testimonial for or an endorsement of XYZ Investment Advisors, Inc., any associated person or our services. “Like” is not meant in the traditional sense; the clicking the “Like” button is merely a mechanism to circulate our Facebook pages. XYZ Investment Advisors requests that any posting to our Facebook page should refrain from recommending us or providing testimonials for our services. To the best of our knowledge, this disclosure approach has not been tested. – Twitter – No retweets of testimonials.• No recommendations: – Do not recommend or “Like” any securities, securities products, or security issuers. – No past recommendations (unless meets SEC Rule 206(4)-1).• 3rd party posts: – If possible, set the social media settings so third-party posts are reviewed/approved by someone at the investment advisor before viewed by public. Delete any inaccurate statements or testimonials.
Recommendations & Best Practices• Certify any third-parties working on behalf of rep or firm are complying adviser’s advertising rules and social media usage policies and procedures.• Review and supervise links to websites/articles as if adviser adopted.• .Add disclosure page to firm/rep’s social media site if possible. – “Like” should not be treated as testimonial; – Educational & general in nature; – No warranties or guarantees; – Information may become dated and will not necessarily be updated; – Reviewing site not substitute for working one-on-one with investment adviser; and – Reviewing site or posting comment doesn’t constitute an engagement with the investment adviser.• Prohibit public disclosure of confidential client information.
Thank You Bryan Hill, President RIA Compliance Consultants, Inc. 877-345-4034 x email@example.com