The U.S. SEC’s Division of Investment Management recently released a Guidance Update (the “Update”)1 concerning the application of SEC filing requirements for certain fund-related communications on “real-time” interactive electronic forums, such as Facebook and Twitter. The SEC Staff offered its views as to whether these communications should be filed with the SEC if they are not required to be filed with FINRA. Although the Update sets forth a rather subjective test to determine which interactive communications need to be filed with the SEC, it does provide further guidance in the form of specific examples.
Section 24(b) of the Investment Company Act of 1940 (the “1940 Act’) requires “any advertisement, pamphlet, circular, form letter or other sales literature” used by certain registered investment companies (except closed-end investment companies) to be filed with the SEC within ten days of use. Rule 24b-3 under the 1940 Act relieves investment companies of the obligation to file advertisements and other sales material with the SEC if that material is filed with FINRA. Further, advertisements subject to Rule 482 under the Securities Act of 1933 (the “1933 Act”) are a form of “omitting” prospectus under Section 10(b) of the 1933 Act that must be filed in accordance with Rule 497 under the 1933 Act. Under Rule 497(i), Rule 482 advertisements also are considered filed with the SEC upon filing with FINRA.
Under FINRA Rule 2210, real-time interactive fund-related communications on blogs and social media sites are considered “retail communications,” assuming the site is available to retail investors. Under FINRA Rule 2210(c)(7)(M), such communications are specifically excluded from the FINRA filing requirements. However, these communications are not among the categories of communications that, even though not technically filed with FINRA, are “deemed” to be filed with FINRA (e.g., “institutional communications”). Therefore, there has been an unresolved question of whether these communications should be filed with the SEC.
According to the SEC Staff, the Update was prompted by inquiries from fund industry participants who were unsure whether interactive content on blogs and social media sites that discussed a fund should be filed with the SEC. The Update addresses SEC filing requirements and provides clarification on these requirements.
In the Update, the SEC Staff notes that whether an interactive communication needs to be filed “depends on the content, context, and presentation of the particular communication,” and requires a review of the “underlying substantive information” in the communication and other “facts and circumstances” relating to its purpose and contents. This is a subjective test, but the Update goes on to provide specific examples of material that the SEC Staff believes should be filed, or need not be filed, with the SEC.
The following are the general categories of interactive communications that the SEC Staff believes generally need not be filed. The Update provides specific examples within each category.
- An “incidental mention” of a specific fund or fund family not related to a discussion of the merits of investing in the fund, such as an invitation to a charity event.
- An incidental use of the word “performance” when discussing a specific fund or fund family, provided that the fund’s average annual returns (or any of the elements of such returns) are not included (e.g., a statement that the complex updates performance regularly, directing the reader to a website where it is published).
- A statement that directs the reader to, or contains a hyperlink to, sales material that has been filed with FINRA.
- A statement that directs the reader to, or contains a hyperlink to, a discussion of broad investment concepts or economic, political or market conditions.
- A response to an inquiry by a social media user that provides general information about the fund that is not related to a discussion of the merits of investing in the fund (e.g., a response to a request for the fund’s NAV on a particular day).
The following are the general categories of interactive communications that, in the SEC Staff’s view, should be filed. The Update also provides specific examples within these categories.
- A discussion of fund performance that provides the fund’s average annual returns (or any elements of such return) or highlights or promotes the fund’s performance.
- A communication initiated by the fund that touts the benefits of investing in the fund.
Impact on Registered Investment Companies and Their Distributors
The Update has implications for registered investment companies and their distributors. As a result, this Update should be taken into account in determining whether to permit employees of a fund’s investment adviser or distributor to use interactive communications that discuss registered investment companies.
Fund investment advisers that permit use of social media by their employees should consider whether and how to design policies and procedures to avoid postings that might be deemed to offer a fund’s shares, potentially raising broker-dealer registration issues.2 To the extent interactive communications are permitted for personnel of mutual fund distributors, FINRA has offered specific guidance in its Regulatory Notices 10-06 (Jan. 2010) and 11-39 (Aug. 2011), reminding FINRA member firms of the recordkeeping, suitability, supervision and content requirements for such communications.
For funds that are not “self-distributed,” the distributor is likely to be the entity best suited to monitor social media communications, because the distributor normally has experience reviewing and filing advertising materials with FINRA if it offers fund shares. Moreover, most of the communications that will appear on the fund’s social media page are likely to have been created or reviewed by an associated person of the distributor, whom the distributor is ultimately responsible for supervising. Also, supervision of social media use in connection with the offering of funds should not create substantial additional compliance requirements if fund distributors, as a business practice, already require interactive communications referencing a specific fund to be pre-approved by appropriate supervisory principals or to conform to a previously approved template.
The next step is to determine whether these communications must be filed with the SEC on the fund’s behalf. Again, the distributor may be the entity best equipped to deal with these administrative duties. If it is determined that social media communications that are functionally Rule 482 advertisements need not be filed with FINRA, then the distributor must have policies and procedures to ensure that the distributor files these communications with the SEC on the fund’s behalf, unless the fund’s investment adviser has policies and procedures in place to do so. Having the distributor assume these functions will likely not be an issue for fund groups that have an affiliated distributor. However, fund groups that use third-party distributors may face added costs if the distributor is asked to assume these SEC filing responsibilities.
That raises an interesting question as to whether the FINRA filing exclusion in FINRA Rule 2210(c)(7)(M) applies to social media postings that are otherwise, because of their content, Rule 482 advertisements. This filing exclusion was intended to codify FINRA’s treatment of interactive communications under prior NASD Rule 2210, which treated such postings as “public appearances” and, therefore, not subject to the filing requirements.
In Regulatory Notice 10-06, FINRA appears to have anticipated the concerns that prompted the issuance of the Update. FINRA noted that while it was seeking to interpret its rules in a flexible manner, such communications may “trigger the requirements under federal securities laws.”3 Thus, if mutual fund distributors determine that the contents of social media postings discussing mutual funds are “retail communications” that constitute Rule 482 advertisements, it would appear that they can choose to file such postings with FINRA under FINRA Rule 2210. Of course, this would require prior principal review of such postings and the administrative requirements (and costs) associated with the filings. Unlike the SEC, whose Staff currently does not provide comments on advertisements filed with it, FINRA’s Advertising Department reviews filed advertising material and provides comments, as it deems necessary and appropriate.
By adopting policies and procedures designed to limit the content of social media postings so that they will not be Rule 482 advertisements, as discussed in the Update, firms can eliminate the need to file such communications with the SEC or with FINRA.