The staff of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) recently published an advisory alert regarding investment advisors’ use of social media and recommended that firms using social media adopt and periodically review the effectiveness of recordkeeping policies and procedures regarding social media in the face of changing technology. See National Examination Risk Alert by the Office of Compliance Inspections and Examinations issued January 4, 2012. The OCIE calls social media “landscape-shifting” for investment advisors because of the way it has changed traditional two-party, advisor-to-client communication into an interactive, multi-party dialogue among advisors, clients and prospective clients. Particularly relevant to the e-discovery and technology fields are the recordkeeping responsibilities required by the federal securities laws that the OCIE says are equally applicable to social media content and communications. Since social media is conducted online, proper organization and maintenance of electronic records will be essential for investment advisors who wish to fully satisfy their recordkeeping obligations while making maximum use of social media for their business.
The highly interactive nature of social media creates a variety of new regulatory risks for investment advisors. For example, the “Like” feature, which allows any person to virtually “approve” of an Internet post, is a seemingly innocuous tool on many social media sites. However, use of the “Like” button in an investment advisor’s social media site could, depending on the circumstances, constitute a “testimonial” which is prohibited under SEC Rule 206(4)-1(a)(1) if it pertains to an investment advisor’s services. The OCIE staff says that the use of the “Like” feature could be deemed a “testimonial” if it is an explicit or implicit statement of a client’s experience with an investment advisor. This seemingly harmless feature, if used by an investment advisor on his or her website, could, therefore, cause that investment advisor to publish a testimonial without any such intention and run afoul of Rule 206(4)-1(a)(1).
Section 204 of the Investment Advisors Act and SEC Rule 204-2, promulgated thereunder, set forth the recordkeeping obligations of registered investment advisors. Specifically, Rule 204-2 requires investment advisors to make certain books and records available relating to their advisory business and to keep them for a specified period of time. In addition, Rule 204-2 requires investment advisors keeping required records in an electronic format to maintain them in a manner that allows the records to be arranged and indexed. In the OCIE staff’s view, the content of the communication is determinative. Therefore, social media content should be scrutinized regularly to determine whether it falls into one of the specified categories of books and records.
The OCIE staff advises that a firm that intends to communicate, or permit its registered investment advisors to communicate, through social media sites may wish to determine whether it can retain all required records related to social media communications and make them available for inspection. This is particularly important because social media offers multiple ways to communicate with existing or potential clients from status updates, discussion boards, emails, texting, direct messaging or chat rooms. The OCIE staff particularly recommends that investment advisors review their document retention policies to ensure that any required records generated by social media communications are retained in compliance with the federal securities laws and in a manner that is easily accessible for a period of not less than five years as required by SEC Rule 204-2. Registered investment advisors should also consider whether their retention policies account for the volume of communication and “unique communication channels” available to each particular social media site. The OCIE staff makes clear that investment advisors that “communicate through social media must retain records of those communications if they contain information that satisfies an investment advisor’s recordkeeping obligations under the Advisors Act.” (emphasis added).
The OCIE staff suggests that investment advisors consider adopting compliance policies and procedures that address the following factors relating to the recordkeeping and production requirements of records generated by social media communication.
- Whether each social media communication used is a required record; if so, a firm should determine the applicable retention period and the accessibility of the records.
- Deciding the best format in which to maintain social media communications (e.g., screen print or pdf of social media page).
- Conducting employee training programs to educate advisory personnel about recordkeeping provisions.
- Arranging and indexing social media communications that are required records and kept in an electronic format to promote easy location, access and retrieval of a particular record.
- Periodic test checking (using key word searches or otherwise) to ascertain whether employees are in compliance with policies and procedures.
- Using third parties to keep records consistent with recordkeeping requirements.
The OCIE staff warns that taking these precautions does not guarantee that a firm will not run afoul of their recordkeeping obligations. Rather, investment advisors should, at a minimum, look at these factors and make sure that their document retention policies accurately take into account social media communications and other content and determine whether those policies can be improved through these suggestions. The OCIE staff recognizes that registered investment advisors are eager to leverage social media to market and communicate with existing clients and to promote their visibility in their field. However, registered investment advisors should ensure that they are in compliance with all of the regulatory requirements and be aware of the risks associated with using various forms of social media.