In what is generally considered one of the masterpieces of modern advertising, Chiat/Day and Apple Computer introduced the Macintosh in 1984 with a 60-second commercial directed by Ridley Scott paying homage to George Orwell's dystopian novel named for that year. Few of us forget that sea of indistinct people, walking in lockstep, as the words of Big Brother wash over them:
"Today, we celebrate the first glorious anniversary of the Information Purification Directives. We have created, for the first time in all history, a garden of pure ideology-where each worker may bloom, secure from the pests purveying contradictory truths. Our unification of thoughts is more powerful a weapon than any fleet or army on Earth. We are one people, with one will, one resolve, one cause. Our enemies shall talk themselves to death, and we will bury them with their own confusion. We shall prevail!"
It's with that iconic commercial in mind that we read the recent flood of articles and press releases about new policies and procedures at LPL, Morgan Stanley and Commonwealth Advisors, along with a handful of other broker-dealers who are finally releasing their advisors to venture forth into the yonder of "social media."
Don't get me wrong. The effort is to be commended, albeit with a polite golf clap. Social media has evolved beyond the "passing fad" stage and has found its place in the social fabric. Many advisors are rightly concerned that they are missing out on a tremendous opportunity to more actively and instantaneously engage with clients and prospects, to be part of the conversation. So the desire on the part of broker-dealers to open this communication channel to advisors is laudable. And the attendant profound concerns regarding a lack of meaningful regulatory guidance are more than understandable.
But what many of these firms are mandating is, to be quite candid, entirely antithetical to the raison d'être of social media-the ability to personally (if not genuinely) engage with others and create a deep individual connection based on shared interests. What at first blush sounds like an encouraging and exciting leap forward quickly fizzles upon closer scrutiny, as the details of the various programs reveal that advisors must select from "pre-approved Facebook status updates, tweets and blog posts."
To term the mass dissemination of pre-approved messaging as "social media" is the financial industry's equivalent to a Bill Belichick press conference. In an effort to control everything, these firms are precluding their advisors from letting their personalities shine through, portraying them more as 1984-esque automatons than vibrant, passionate individuals. There simply has to be a better way.
The Regulatory Hammer
At present, the only significant regulatory opinion on social media can be found in FINRA Regulatory Notice 10-6, published in January 2010 to provide "guidance on blogs and social networking Web sites to broker-dealers." And although a social media "sweep letter" was sent by the SEC to a number of firms earlier this year, when and if SEC guidance will be forthcoming remains to be seen.
So just how exposed are the broker-dealers and advisors who actively engage in social media? Are the regulatory and compliance challenges associated with social media really that daunting?
Rule 204-2 of the Investment Advisers Act of 1940 says advisors must archive and retain most client communication and advertising. Whether you are posting a blog about organizational changes at your firm or sending a tweet of thanks to your amazing support team, as far as regulators are concerned, it's considered an advertisement. Thus, any statement made online, regardless of its nature, should be subject to your firm's books and records retention policy and procedures.
The more difficult challenge comes with establishing a proactive social media surveillance process to effectively monitor and review this type of instant communication. Rule 206(4)-1 of the 1940 act prohibits deceptive practices and untrue or misleading statements. The need for advisors to monitor this behavior becomes more complex when they are dealing with social media and blogs.
For example, how many advisors know that the seemingly invisible "meta tags" and keywords embedded in a blog for search engine use can be construed as false or misleading? Or that links to third-party Web sites may attribute these comments back to the advisor?
The good news, however, is that a number of technology solutions are emerging to address social media archiving and retention concerns, and a select subset of these solutions (such as MailBanc, Arkovi and Erado) are now providing robust and effective compliance monitoring and surveillance functionality. The archiving key is that these tools connect to popular social networking sites at the API level, thereby archiving all activity without requiring the use of any special applications. And with the inclusion of social media activity in mail archives, built-in surveillance engines can apply their comprehensive compliance rule set, keywords and phrases to review all captured social media activity from LinkedIn, Twitter, Facebook and just about any other social media outlet that provides access to an RSS feed (including blogs) to ensure compliance.
"We Shall Prevail"
Sooner or later, all firms will have no choice but to allow their advisors to join the world of social networking. Whether they embrace the new media or ultimately are dragged kicking and screaming into the future remains to be seen. The extent to which they unshackle their advisors from excessive communication restrictions, however, will ultimately hinge on the level of trust they have in those individuals who represent their company on the front lines. And that, in itself, may be a game-changer. Firms often tailor their supervision or review to their weakest links, which means perhaps they will reconsider how weak a link they are willing to employ. Alternatively, perhaps the stronger links will begin to consider whether they are working in an environment that is conducive to their needs.
It brings to mind a popular Cold War phrase in use around the same time as the iconic Macintosh ad: "Trust but verify." Perhaps it's a philosophical approach that would serve firms well as they develop and refine their social media policies and procedures.
How effectively you navigate the regulatory hurdles surrounding the social media revolution will be determined by: 1) your ability to install a comprehensive, proactive process for the surveillance, archiving and retention of social media; 2) your ability to document those processes in your written policies and procedures; and 3) your ability to effectively leverage emerging technology to minimize the human capital impact on operations.
To the first big firm that not only unlocks but truly hands the keys to the social media kingdom to their advisors, we suggest you seriously consider dusting off and co-opting the 1984 ad-for you will have essentially hurled the proverbial hammer through the video screen and helped launch a revolution.
Brian Hamburger, JD, CRCP, AIFA® is the founder and managing director of MarketCounsel, the leading business and regulatory compliance consulting firm to the country's pre-eminent entrepreneurial investment advisors. He is also founder and managing member of the Hamburger Law Firm.