Investment Advisers Need Strong Policies and Procedures for Supervising Social Media

June 23, 2015

Social media and networking websites are considered forms of advertising covered by Rule 206(4)-1, Advertisements by Investment Advisers, under the Investment Advisers Act of 1940 (“Investment Advisers Act”) and similar state securities regulations.  In a National Examination Risk Alert issued in 2012 by the Office of Compliance Inspections and Examinations of the U.S. Securities and Exchange Commission (“SEC”), the term social media is described as:

“Social media” is an umbrella term that encompasses various activities that integrate technology, social interaction and content creation. Social media may use many technologies, including, but not limited to, blogs, microblogs, wikis, photos and video sharing, podcasts, social networking, and virtual worlds.

As the use of social media becomes an increasingly common communication and marketing tool, investment advisers must have in place strong policies and procedures to help protect them from violations of Rule 206(4)-1 under the Investment Advisers Act or the applicable state regulations for state registered investment advisers.  Unfortunately, because social media platforms allow for information to be changed and distributed to a large audience very quickly, social media may present a challenge for investment advisers in their efforts to comply with the requirements under Rule 206(4)-1 or the applicable state securities regulations.

An investment adviser’s policies and procedures should identify the social media platforms that the investment adviser uses and the social media platforms that the investment adviser allows its investment adviser representatives to use as well as those platforms that the investment adviser prohibits its investment adviser representatives from using.  An investment adviser may also want to consider addressing in its written policies and procedures what possible disciplinary actions the investment adviser may take when a violation of the investment adviser’s policies and procedures occurs. To confirm that all supervised persons of the investment adviser have reviewed, understand, and agree to comply with the investment adviser’s social media policies and procedures, the investment adviser may consider obtaining, from each supervised person of the investment adviser, written acknowledgements of receipt and understanding of the investment adviser’s social media policies and procedures. Each investment adviser should also develop a standard way, such as a social media review/approval form, for supervised persons to report all social media sites that may make reference to or market the investment adviser or its services. The investment adviser should then require written approval or denial prior to using any social media sites to reference the investment adviser or its services.

In addition to developing policies and procedures to comply with Rule 206(4)-1 under the Investment Advisers Act, an investment adviser must take into consideration social media sites when addressing it policies and procedures for record retention requirements under the Books and Records Rule, Rule 204-2 of the Investment Advisers Act. Since social media sites are a form of advertising, an investment adviser’s policies and procedures should identify when and how electronic communications will be gathered, reviewed, retained, and maintained. An investment adviser may consider using a third party to assist with electronic surveillance and electronic messaging and data archiving for social media and networking sites. Advertising records must be maintained for five years from the date of last use and should be easily accessible so that they may be produced, if requested, during an examination of the investment adviser. If an investment adviser is using a third party service provider to assist with archiving or supervising social media sites used by the investment adviser or its investment adviser representatives, the third party should be identified in the investment adviser’s policies and procedures.

Because new forms of social media can become available at any time and what can be done through or with social media is constantly changing, an investment adviser needs to frequently review, and update as necessary, its social media policies and procedures. An investment adviser should consider establishing internal training to keep investment adviser’s supervised persons informed of the investment adviser’s social media policies and procedures and any limitations or restrictions that exist regarding the use of social media.

For more information concerning supervision of advertising and social media for investment advisers, RIA Compliance Consultants is hosting a webinar, “Session 5 – Advertising for Social Media,” as part of its “Conducting an Annual Compliance Review” series, on Thursday, June 25, 2015, at 12:00 CDT. For more information or to register for this webinar, click here.

Additionally, RIA Compliance Consultants has a variety of sample forms to assist investment advisers with meeting their ongoing compliance requirements. A Social Media Review-Approval Form is available for purchase for just $75. For more information or to purchase this form, click here. For a complete list of our available forms, click here to access our online store.

Posted by Bryan Hill
Labels: Compliance Forms, Compliance Program, Social Media