By Michael Byrnes
Not much has changed in the world of social media compliance recently, although the Securities and Exchange Commission made new charges against an investment advisor and sent out an alert:
The SEC announced Jan. 4 that an advisor was charged with selling "fictitious securities" in a LinkedIn scam. It should be noted that actions such as this are wrong no matter what communication tool is used.
On the same day, the SEC issued a "National Examination Risk Alert" to provide guidance. No rule changes were included.
The SEC has been stepping up its guidance on social media, an official confirmed. "The agency is trying to work together to have coordinated actions," said Robert Kaplan, co-chief of the SEC's Asset Management Unit.
Social media is new, but marketing abuses go back long before it was ever around, he explained, noting that scam artists made use of faxes and then fraudulent emails before social media became popular. "Now social media provides a new ability to interface with investors, which creates some risks," Kaplan said.
Social Media Regulation
Finra tackled the issues surrounding online marketing by forming a task force to look at social media in 2009, said Joe Price, senior vice president of advertising regulation/corporate financing at Finra.
At that time, no broker-dealers allowed their advisors to use social media. But those prohibitions were lifted after Finra issued Regularity Notice 10-06, which spelled out how advisors could properly use the medium. The new rules, for example, explained the difference between static and interactive communications, and how a static social network profile page needs to be preapproved like an advertisement, but interactive content does not.
Following 10-06, "Firms began to hire compliance vendors that could meet the regulatory requirements. Now hundreds of firms are using some form of business communication over social media sites," Price said.
Once firms started to roll out social media use, they still had many compliance questions. As a result, FINRA issued Regularity Notice 11-39 in an attempt to clarify the ground rules.
Firms also looked to one another for guidance. "Firms are becoming more interested in what other firms are doing," Price said. "[They are] sharing experiences-what works and what doesn't work for them. They are looking at their own experiences."
Finra proposed new amendments to rules to the SEC last year, Price said.
One of Finra's recommendations was to eliminate the pre-filing requirements for interactive communications. Price added, "We can't be sure what [the SEC is] going to do or not do," Price said.
Blane Warrene, CEO of Arkovi, one of the leading social media archiving companies, believes that Finra does not feel firms should have to get a pre-review every time they use Twitter. "By classifying Twitter communications as correspondence [the messages] still need to be retained, but it will be significantly easier to use Twitter," he said.
Firms will sometimes have to make their own judgments about what falls into what category. "It is up to the firms to interpret the rules, like 'Is it static or interactive?' We haven't done a laundry list. There might be some confusion about what is static and interactive," said Price.
So why not be clear about every facet of social media? "If we get too granular today, we might put ourselves in a box," Price explained.
Social media changes so fast, and none of us have crystal balls, so it is hard to fully predict what the social network landscape will look like in the years to come. Price admitted that regulators might never be able to fully catch up.
"However, if you look at what FINRA has been doing in regards to social media, we have gotten out ahead of other regulatory organizations," said Price.
The SEC's Risk Alert
Drew Bowden, who heads the National Investment Adviser/Investment Company Examination Program in the SEC's Office of Compliance Inspections and Examinations (Ocie), said, "The intention of the risk alert is to be a useful tool. It is not prescriptive. It is not policy. If you choose to use social media, it is a checklist of things to consider under pre-existing rules."
The SEC staff felt the need to put out the alert as there are a lot of divergent practices and cases where advisors are using social media in a fraudulent manner.
"The regulation of investment advisors is never going to be as black and white as some people would like, especially in an area like social media, that is moving so fast," said Bowden. "Firms will need to make some day-to-day judgment calls, weighing potential benefits and risks. Most firms are trying to consider the full range of issues and use good judgment when making sound social media policies and decisions, and we are hopeful that the alert will assist them in that effort."
Bowden encourages the industry to let the SEC know if there is a need for more guidance.
Stephanie Sammons, CEO of Wired Advisor, said she has reviewed a number of financial firm social media policies and most of them are focused on trying to provide granular rules for each social network's controls and actions. She feels it is a nightmare to navigate these policies and doubts financial advisors will be able to clearly remember all of these parameters. "We should give financial advisors the best opportunity for success and not set them up for failure," she said.
One thing is for sure: Retaining social media communications is a must, which positions firms like Arkovi, Socialware, Erado, Actiance, Smarsh and others for a continued wave of new business.
Warrene said Arkovi loves the guidance. "It amplifies what we have said for three years: Archive, comply and leverage business data that you have all in one place." He suggested that archiving can have more benefits than just from a compliance stand point, so if firms and advisors are not already doing this, it is another reason to do so.
Social media is a new marketing tool that will continue to advance, likely faster than regulators can keep up with. As a result, old rules continue to reign, which will require compliance professionals to interpret how they put social media into practice. Those that are too conservative will be left behind, while those that do not use common sense will be at risk.
As always, check with your compliance department for specific guidelines on what your organization will allow you to do with social networks.
Mike Byrnes founded Byrnes Consulting to provide consulting services to help advisors become even more successful. His expertise is in business planning, marketing strategy, business development, client service and management effectiveness, along with several other areas. Read more at www.byrnesconsulting.com.