Asset Management Intelligence - August 2015 - To Tweet or Not To Tweet: A Regulatory Perspective

Published: Aug 7, 2015
Share

Introduction

With the explosion of social media around the world, it is no wonder it has caught the attention of almost every regulatory body. Social media (Linkedin, Twitter, Facebook, etc.) has become so widely used that it is now the way many individuals communicate with each other and cuts across the socio-economic and generation gaps from Baby Boomers and Gen Xers to Millennials. Social media is also becoming more widely accepted in the financial services world, especially in selling activities and getting the word out as to the capabilities of investment advisers, wealth managers, broker-dealers, et al. to a broad group of potential prospects in a very cost-effective way. This type of communication raises the bar for misrepresentation and fraud in an area that had not been addressed by regulators and legacy enterprise risk management programs until recently. Social media has been responsible for wide-spread fraud through fraudulent stock market and other postings that have had a negative impact to company brand recognition.

In this ever-changing environment, and at the speed with which social media is expanding, how does management keep up with, monitor and manage its social media risk?

Managing Social Media Risk

For an investment adviser or broker-dealer, managing social media is somewhat of a daunting task as there are many areas of vulnerability and regulatory concerns—yet they are required to do so under SEC and FINRA directives.

Some of the regulatory inflection points start with antifraud considerations. For example, financial services firms, law firms, merger and acquisition departments within financial service firms and even publicly traded companies must consider the impact of the unauthorized release of proprietary and insider information that could lead to an SEC claim of insider trading. These firms would not be able to avoid the potential impact of postings of information without authorization or employees misrepresenting themselves and their firm’s investment advisory capabilities, for example, or broker-dealer sales staff making false claims of safety or “ensuring” either investment performance or a secure retirement life when seeking retail prospects. While many of these types of disclosures are appropriate, they must be accompanied by disclosures and/or disclaimers and approved by the firm. Employees of publicly traded companies who disclose confidential financial information in advance of a company announcement potentially trigger both a claim of insider trading and Regulation Fair Disclosure (“FD”) infractions. Regulation FD requires a simultaneous release of information by the company when a person acting on its behalf discloses material non-public information. In this instance, if the employee releases the information by posting to Linkedin or any other social media site, there is no technology process, procedure or control that can prevent or even notify the subject firm of such posting, other than a company official responsible for compliance being “friended” or somehow connected to that given employee (which, essentially, means the compliance officer would need to monitor every employee in the company) for that site. This is not a manageable solution without some form of social media software to detect these unauthorized disclosures. Even if they are detected, it may be impossible to officially release the information in line with SEC expectations.

In addition, social media communications could potentially result in impermissible general solicitation of private placement Regulation D offerings or gun-jumping the market in advance of a public offering. General solicitations could result in a discontinuance of the private offering in a cooling-off period and a rescission of sales during the period. Instances where a private offering is being made in reliance on 506(c) could have adverse impact with 502 offerings within a 6-month window; triggering integration issues that can disqualify the 506(c) offering if the timing of the release of information deemed to be prospectus general solicitation information is premature.

One the most common areas of concern that triggers a regulatory reaction that all investment advisers deal with is whether certain disclosures are, or can be deemed to be, a testimonial. Any language disseminated by an adviser that, directly or indirectly, relates to a testimonial is explicitly verboten under Rule 206(4)-1. The Rule also references untrue or false representations and to omit information that would make other statements made not misleading, in light of the circumstance in which such statements were made, as well as past specific investment recommendations without adding additional disclosures, referencing the use of a chart to buy and sell securities unless disclosing the limitations of the chart or formula, among many of the other requirements.

The previous represents some of the regulatory issues, but certainly not an exhaustive list of scenarios, that can arise when social media is inappropriately used in a financial services business context. This can present both regulatory and headline risks that a financial services firm must avoid to perpetuate its growth.

Where Does the SEC Stand on Some of These Regulatory Matters?

As in most conflicts of interests between advisers and its clients or potential clients, it is the SEC’s view, as expressed in various pronouncements, that as long as there is a process to address the conflict of interest and that process mitigates the conflict to an acceptable level where the client or prospective client is or may not be adversely affected, then publicly made commentary about an adviser and its capabilities to reasonably ensure that inappropriate language is not posted on social media sites should not be problematic. When commentaries go undetected is when there can be a devastating downstream regulatory response.

What would constitute a reasonable process is an ongoing active means of monitoring to detect potential damaging disclosures posted on public websites, which would entail an active review process memorialized in the adviser’s SEC Rules 206(4)-7 or 38a-1 compliance programs and a broker-dealer’s written supervisory procedures that makes use of both technology and in-house compliance oversight.

Asset Management Intelligence - August 2015