In a recent risk alert, the Securities and Exchange Commission informed investment advisers about the importance of establishing social media guidelines and enforcing their compliance.
The SEC used a recent enforcement action as an example, where an investment adviser was charged with offering fictitious securities via social media sites such as LinkedIn. In that action, an Illinois-based adviser made false representations about his assets, failed to meet recordkeeping requirements, and did not implement compliance policies and procedures, the SEC alleged, all the while offering more than $500 billion in fictitious securities using social media.
“Fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes,” Robert B. Kaplan, co-chief of the SEC enforcement division’s Asset Management Unit, said in a statement announcing the charges. “Social media is no exception, and today’s enforcement action reflects our determination to pursue fraudulent activity on new and evolving platforms.”
The same day, the agency released its risk report, which informs the financial services industry that “firms using social media should adopt, and periodically review the effectiveness of, policies and procedures regarding social media in the face of rapidly changing technology.”
Firms should consider factors like content standards and guidelines for usage, such as providing an exclusive list of approved social media networking sites for advisers’ use or delineating specific functionalities on a site that should not be used.
Monitoring and the frequency of monitoring should also be considered by firms, including the possibility of preapproving content, the agency suggested. The training of advisers on social media policies may be a good option for firms, in which employees will receive certification of such training.
For firms that allow third parties to post content on their social media sites, policies and procedures should be considered to avoid violation of federal securities laws. For example, if a client is invited to “like” the biography of an adviser on Facebook, that choice could be deemed a testimonial as an explicit or implicit statement of the client’s experience with the adviser – something that is prohibited.
The risk alert also notes that recordkeeping obligations for advisers are applicable to all forms of media, including Internet communications. Therefore, social media communications should be retained in a manner that is easily accessible for a period of not less than five years, in accordance with federal securities laws.
To read the SEC’s risk alert, click here.
Why it matters: While the risk alert is specific to investment advisers, its advice is universal for any company using social media platforms. It also serves as a reminder that regulatory agencies are monitoring – and taking action against – those companies that fail to comply with relevant laws as applied in the online world.