The first of this month Goldman Sachs announced that it would be hiring a new “social media community manager.” This report comes on the heels of Morgan Stanley’s announcement in March that it was launching a new social media program designed to enable its nearly 17,800 financial advisers to use Twitter and LinkedIn to disseminate investment information and insights. The moves by these two giants are sure to trigger a race in Wall Street to conquer the social media landscape for financial and investment services.
But why has the financial services industry been so slow to join the social media frenzy? For one, it worries about the legal pitfalls of letting their legions of advisers loose into unchartered territory. And their unease is not totally unfounded. As posted previously on The Network, the Financial Regulatory Authority (FINRA) brought an action last year to suspend and fine a California-based broker $10,000 for promoting certain investments in “a series of ‘misrepresentative and unbalanced’ messages” to her 1,400 Twitter followers. And as recently as a few months ago, the Securities and Exchange Commission (SEC) charged an Illinois-based investment adviser with securities fraud for offering to sell “more than $500 billion in fictitious securities through various social media websites.” These regulatory actions precede a set of notable guidance letters from both the SEC and FINRA, briefly discussed in the prior post, but reviewed in more depth below.
In January the SEC published its first risk alert on the use of social media by investment advisers, cautioning advisers that social media communications are subject to “federal securities laws, including, but not limited to, the antifraud provisions, compliance provisions, and recordkeeping provisions,” of the Advisers Act of 1940. According to Robert Bartlett, a Professor at UC Berkeley School of Law, the fact that many social networking sites combine static information (previously regulated by FINRA as a type of advertisement, requiring prior principal approval) and real-time, interactive information (previously regulated more loosely as a real-time communication) created considerable uncertainty for FINRA members wanting to communicate on sites such as LinkedIn or Facebook, because these sites blend the two mediums.
FINRA has also provided some advice and guidelines on the use of blogs and social media sites. In Regulatory Notice 10-6how existing SEC and FINRA regulations apply to various social media communications. In particular, publicly available sites such as Twitter are considered advertisements while password-protected sites such as Facebook and LinkedIn are deemed sales literature. Chat room discussions and Q&As on Facebook or LinkedIn, for example, are viewed as public appearances, but instant messaging to individual clients or less than 25 potential clients within a 30-day period are classified as correspondence.
This means that firms and financial advisers are subjecting themselves to a variety of recordkeeping requirements, third-party rules and more every time they interact with clients through these various tools and platforms. Something as quick and easy as retweeting a third-party’s comment would be considered an endorsement by the firm or financial adviser and subject them to liability for its content. Professor Bartlett adds, “FINRA has made clear in its enforcement activity that notwithstanding the informal nature of a “tweet” or Facebook “post,” such communications can constitute recommendations for a security, thereby subjecting the communication to the requirements of the investor suitability rule.”
Despite these guidance letters, many financial services firms still prohibit their employees from using Facebook and other social media sites at work. Even Morgan Stanley, which is set to launch its new social media program this June, will restrict its advisers to using only canned or pre-approved messages. While this is a start, firms will need to become increasingly comfortable with loosening the reigns of their financial advisers to keep up with an investor community that is increasingly “living social.”
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