In late 2010, the Securities and Exchange Commission (the SEC or the Commission) sent a “sweep” letter (the Sweep Letter) to a number of registered investment advisers requesting information on their involvement with social media and related recordkeeping practices. The Sweep Letter appears to signal heightened regulatory awareness that social media websites such as Facebook and LinkedIn are increasingly being used by investment advisers to connect with clients. Use of these sites may present regulatory issues under the advertising rules of the Investment Advisers Act of 1940 (the Advisers Act).
Sweep Letter Requests
The information requested by the SEC in the Sweep Letter indicates that the Commission is focusing on advisers’ recordkeeping, training, supervisory and other policies with regard to social media use. Items requested include:
- Documents that identify the adviser’s involvement with or usage of all social media websites;
- Communications made or received by the adviser on social media websites, including “snapshots” of documents;
- Policies and procedures covering the use of social media, posting communications, prospective communications and ongoing monitoring or review processes by the firm and third parties;
- Policies and procedures for firm employee use of social media in both business and personal contexts;
- Documentation of how employees are trained in using social media for business or non-business use;
- Documentation of any formal or informal disciplinary action related to firm personnel use of social media; and
- The adviser’s record retention policies and procedures concerning use of social media by the adviser, its employees or any third party.
Existing Regulatory Guidance on Social Media Use
To date, the SEC has not yet addressed investment adviser use of social media directly through its releases. The Commission’s 2008 release, “Commission Guidance on the Use of Company Web Sites,” provided general guidance on how companies should use the Internet, with portions of the release touching on advertising regulation.
Of particular interest to investment advisers who use social media is the Commission’s discussion in the 2008 release of third-party statements. The 2008 release discussed the Advisers Act’s prohibitions on the use of testimonials in investment adviser advertising, which are broadly defined to include all material designed to induce a potential client or clients to subscribe to investment advisory services. While communications to existing customers are not normally considered advertising, this determination is contingent on the nature of the communication and the audience that receives it. Under the theories of entanglement and adoption, an investment adviser may be responsible for third-party content. The entanglement theory provides that if a firm or its personnel are involved with the preparation of third-party information they link to, they may be held accountable. Under the adoption theory, attribution to a firm stems from an explicit or implicit endorsement or approval of the content of third-party information. The Commission’s 2008 release made clear that under these theories, the SEC may treat third-party information that an adviser links to as a prohibited testimonial under the Advisers Act. Communications to existing customers are also subject to the SEC’s anti-fraud rules.
The Financial Industry Regulatory Authority (FINRA) has increased its scrutiny with respect to social media use by broker-dealers. To the extent a firm provides both brokerage and investment advisory services, it would be required to abide by both FINRA and Advisers Act rules. While FINRA guidance may not be strictly applicable to certain investment adviser activities with respect to social media, the SEC has recommended that, in the absence of specific rules under the Advisers Act, advisers should follow FINRA’s rules on supervision of social media activities. FINRA’s Notice 10-06, “Social Media Web Sites,” released in January of 2010, provides specific rules for its members’ use of social media. FINRA Notice 10-06 divides the content of social media sites into two types — static and interactive. Static content consists of relatively permanent postings such as a profile, background or wall information. Static information must be approved by a registered principal of the broker-dealer prior to its posting. Static content is considered to be an advertisement and must be treated as such. Interactive content (e.g., chat rooms), which FINRA’s guidance describes as “non-static, real-time communications,” must be supervised by the firm to ensure that postings do not violate the content requirements of FINRA’s communication rules. These rules include following principles of fair dealing and good faith in communications with the public, making statements that have a sound basis in fact, refraining from false, exaggerated or misleading statements and ensuring that statements do not predict or project future performance.
Advertising Issues Raised by Social Media
In the Sweep Letter, the SEC requested that advisers provide documents on their use of all social media, but it pointed specifically to Facebook, Twitter, AdvisorTweets.com, LinkedIn, LinkedFa, YouTube, Flickr, MySpace, Digg, Reddit, RSS, blogs and microblogs. Each of these sites or types of social media has specific aspects that may create regulatory difficulties when used by an investment adviser’s personnel in business or non-business contexts. For example,
- Postings on general social media websites such as Facebook, MySpace or Twitter (and the AdvisorTweets aggregator) could be considered advertisements to the extent that they describe a particular investment advisory service; similar postings on video and photograph sites like YouTube and Flickr can have similar effects.
- User ability to promote an adviser’s reports, articles or other communications on social news sites may result in comments that could be considered testimonials by the Commission.
- On a business networking site like LinkedIn or LinkedFA, recommendations of an adviser’s financial services may also be viewed as testimonials.
- Blogging creates static content; any recommendations of or inducement to contract for advisory services are subject to the Advisers Act’s advertising rules.
- Firms that remove content, whether by deleting comments on a blog or taking down a Facebook post, may run afoul of recordkeeping requirements if a copy of the deleted communication is not archived. Removal of content without saving a screenshot could constitute destruction of records under the Advisers Act.
Developing a Robust Social Media Policy
Based on FINRA guidance and existing Advisers Act rules, an adviser should have a strong monitoring and supervisory program in place with respect to its social media activities. To the extent practicable, a firm should develop and articulate its social media policy prior to creating a social media presence. Employee blogging, tweeting and social media activity can take place either as a part of business or private life. As the Sweep Letter indicates, the SEC is concerned with business and non-business use of social media by investment advisory firms and their personnel as well as firms’ social media use, training and monitoring activities. A firm’s social media policy should thus address both personal use and firm business use.
As a general matter, a firm may also want to consider dividing up its social media policy into different groupings, including: (1) information technology-related social media procedures (e.g., retention, e-hardware and disposition); (2) policies directed at company-approved users; (3) policies directed at personal, non-business use; and (4) policies directed at non-company approved users. A firm may also want to include some general instructions on “netiquette” and how company-approved users should respond to news media, investors and others.
Personal Use Social Media Policy
The tone that a firm takes in its policy for employees’ personal use of social media is important. Employeefriendly policies are generally more effective than a long list of directives. In that regard, firms should consider embracing the fact that their employees do and will use social media in their private lives, but should have a policy that educates employees to influence their behavior and ensure that employees adhere to company policy. A firm’s policy for personal use of social media should consider:
- Prohibiting use of the firm’s name;
- Prohibiting the disclosure of trade secrets;
- Requiring that blogging or social networking not interfere with job duties;
- Prohibiting the use of company logos and trademarks;
- Addressing the permissibility of employee discussions of competitors, clients and vendors;
- Emphasizing each employee’s personal responsibility for content that he or she posts;
- Requiring disclaimers when an employee blogs;
- Tying back to the firm’s code of conduct or similar policy; and
- Making policies specific as overly-broad policies can trigger labor law issues.
As with any policy applicable to employee personal conduct, the social media policy should be written and posted, contain specific definitions, detail prohibited activities, require signed acknowledgment, and be enforced to punish violators. The Sweep Letter signals that the SEC is interested in determining the extent to which investment advisers are working to ensure that their employees are using social media responsibly and within the constraints of law and regulation when engaging in business, and that employee social media use outside the workplace is somehow being monitored to prevent regulatory transgressions.
Business Use Social Media Policy
A firm should tailor its social media policy for business use to its particular needs and consult with its compliance department and legal counsel to ensure the adequacy of the policy and legal ramifications of actions taken in connection therewith. It is particularly important that a firm’s communication through social media be made by designated individuals who have been trained in the legal ramifications of social media use. A firm’s compliance department should consider taking an active role in training, and should ensure that employees using social media on behalf of the firm are adequately supervised and that their postings are monitored for legal compliance on an ongoing basis. While not required by law, review and pre-clearance of static postings by a designated individual is a FINRA best practice that provides an additional level of assurance that the firm’s business use of social media complies with the Advisers Act. Firms may also want to consider various methods of post-use review, including sampling. The type of review will vary depending on the type of social media, e.g., unscripted chat rooms, static and non-static blogs, combination blogs, etc.
A firm’s social media presence should be limited to particular individuals who have been trained by and receive ongoing supervision from the firm, because actions taken to satisfy one particular aspect of the law may have unintended consequences in other areas. For instance, a decision to remove customers’ descriptions of their interactions with an advisory firm in order to avoid offering testimonial evidence could be viewed as manipulating communication to present a social media presence that is misleadingly positive if negative comments about the firm are deleted. Additionally, the limited amount of space that certain social media forms allow, such as the few lines of a Facebook comment that are visible and Twitter’s 140 character limit, may preclude required disclosures, including the statement that an employee’s tweets or messages do not reflect the views of the firm.
Reliance on all-in-one solutions or automated processes may not be sufficient to ensure that communications are properly screened and archived. The use of an automated system or delegation of monitoring duties to a service provider will not relieve a firm from the requirement that its procedures be reasonably designed to ensure that interactive electronic communications do not violate SEC and other applicable rules. Any adviser’s archiving system should be sufficient to preserve records required to be kept and to prevent prohibited material from being disseminated. The monitoring and archiving system should be examined and re-evaluated on a regular basis to ensure that relevant material is being captured and that the monitoring system continues to address effectively the compliance issues that the evolution of social media platforms poses. Compliance personnel should also be involved in testing the social media policy’s effectiveness to ascertain whether communications on social media sites that should be archived are being captured for the firm’s records. Firms should notify employees that their social media use will be treated as public statements and that the firm will monitor publicly-available content.
With the potential for SEC enforcement and further rulemaking in the wings, a robust social media policy will allow firms to address this developing issue in a manner that will keep them and their employees compliant and allow a beneficial social media presence.