AS the securities industry finally warms up to using social
media sites such as Facebook and LinkedIn, regulators are discovering that
brokerages and investment advisers are off to a rocky start.
Some firms are making major missteps as they ramp up their presence
on the sites, and many do not even have social networking policies. Or if they
do, many have inadequate guidelines.
And while many brokerages and investment advisers were once
reluctant to use social media for their work, a growing number find they cannot
ignore the marketing opportunity. They are increasingly using social media
sites to increase their presence among customers and to recruit new business
A recent survey by the Massachusetts Securities Division
found that 44% of the state's investment advisers use at least one social media
site. More are expected to use social media within the next year.
Social networking sites, however, have caused a great deal
of angst for compliance departments at firms. Many compliance professionals
have worried that using social media would expose their firms to scrutiny from
regulators for, among other things, not saving copies of the messages sent
through the sites.
But findings from industry regulators suggest that some
firms are not taking that scrutiny as seriously as they once did, and
brokerages that still prohibit social media use can be sloppy about making
their policies known.
For example, the Financial Industry Regulatory Authority,
the retail brokerage industry's self-funded regulator, asked questions about
social media in more than 1 000 brokerage examinations since mid-2010. Not
having a social media policy in place - even one prohibiting the use of social
media - was the most common violation of industry regulations, according to Amy
Sochard, director of advertising regulation at FINRA.
But simply adopting a policy does not guarantee a smooth
examination, a periodic regulatory review for brokerages. Failing to enforce
existing social media policies, whether through record keeping or the storage
of electronic communications, was the second most common violation, Sochard
said at a recent FINRA conference.
Similar problems are cropping up at registered investment
advisers, which are regulated by the SEC and by state regulators.
How one firm fell short
A recent follow-up letter to a registered investment adviser
examined by a state regulator gives clues about the scrutiny firms can expect
as they ramp up social media communications.
In the letter, obtained by Reuters, the regulator said the
investment adviser did not create and outline proper procedures for social
media use and did not adequately train employees. Simple guidelines, however,
such as what types of posts were allowed or not, did not exist.
The source who provided the letter to Reuters asked that
neither the firm nor the state involved be identified.
The firm, whose employees often used LinkedIn and Facebook,
also fell short by not checking up on their activities there, even though it
hired an outside company to save messages employees sent through the sites.
The regulator suggested mapping out a periodic review of
Investment firms "are shooting themselves in the
foot," said Scott Peterson, co-founder of Relay Station Social Media LLC,
a Washington-based consultancy. "Social media is its own kind of
animal" and requires a policy of its own, he said.
Regulators typically send so-called "exam
deficiency" letters after examinations of both brokerages and investment
advisers to outline compliance problems that a firm needs to correct.
Another issue for compliance professionals is crafting a
clear policy to require prior approval of employees' posts to the site, or
spelling out procedures for ensuring that employees are acting in the best
interests of their clients, in the event employees post investment
What does 'like' mean?
An ongoing struggle for advisers is uncertainty over whether
investors who click the "like" button on an adviser's Facebook pages
are effectively giving testimonials, or a positive endorsement about the
adviser. Similar questions also apply to recommendations clients may write for an
adviser on professional networking sites, such as LinkedIn.
Use of client testimonials about an adviser's investment
skills is a heavily regulated area.
The practice is severely restricted for brokerages and not
even permitted for registered investment advisers. Still, there is little
clarity from regulators about whether they may construe a "like" as a
"testimonial." The SEC, in guidance from examination results it
published in February, mentioned the concern, but left the question open.
Firms that are already concerned about clients
"liking" their advisers on Facebook may be even more jittery after
seeing how that detail was addressed during the state examination.
The state regulator asked the adviser to provide an
explanation about why it does not consider a "like" on Facebook to be
considered a testimonial.
If the adviser cannot provide that explanation, it will have
to disable the "like" button, according to the letter.
One state that is among the few that are more specific is
Massachusetts. Guidance released by Massachusetts securities regulators in
January concluded that clicking the "like" button on Facebook,
without further client commentary, is not considered a testimonial.
But uncertainty over "liking" and more social
media issues in other jurisdictions will eventually lead to additional input
from regulators, said Paul Cox, chief executive of Business Compliance
Partners, a San Diego-based compliance consulting firm.
"At the current volume of social media deficiencies
discovered during examinations, creating new rules and issuing new guidance
will be warranted and required in the future," Cox said.