State Privacy Laws and Investment Advisers’ Recordkeeping Requirements

August 16, 2012

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Recently, Maryland and Illinois have passed employment privacy laws that could potentially have an effect on investment advisers and their recordkeeping requirements under both state and SEC rules. Delaware passed a similar privacy law that protects students from infringement by educational institutions. Maryland was the first state to pass a law of this kind in May 2012. Illinois followed a couple months later in July 2012. Several other states have similar bills on the docket for their state legislatures and members of Congress also have a bill to deliberate.

Under these new laws recently passed by Maryland and Illinois, employers are prohibited from requesting access to their employees’ or potential employees’ social media accounts. As we discussed in a previous article, these laws create a potential hurdle for investment advisers because social media content may be considered advertising as was indicated by the U.S. Securities and Exchange Commission’s (“SEC”) in a National Examination Risk Alert issued in January 2012. If investment advisers are not able to request access to the investment adviser representatives’ social media accounts, the investment adviser may not be able to properly monitor and maintain appropriate records related to the social media content resulting in a potential violation of state or SEC recordkeeping requirements.

The Maryland law has an exemption that would allow an investment adviser to request access “based on the receipt of information about the use of a personal website, internet website, web-based account, or similar account by an employee for business purposes from conducting an investigation for the purpose of ensuring compliance with applicable securities or financial law or regulatory requirements.” Therefore, if an investment adviser knows that an investment adviser representative is using his or her personal social media account for business purposes, the investment adviser can request access in order to meet its recordkeeping requirements. The investment adviser must have information or knowledge that the investment adviser representative is using the account for business purposes though; it cannot just request access with no reason.

Another important element of the Maryland law, verified by the Maryland Department of Labor, is that it does not apply to independent contractors. Therefore, if the investment adviser is structured in a way that the investment adviser representative is an independent contractor, the investment adviser is not subject to the prohibition stated in the recently passed privacy law and is able to require investment adviser representatives to provide the investment adviser with access to personal social media accounts.

Illinois labor law is the same regarding independent contractors. According to the Illinois Labor Department, independent contractors do not receive the same benefits from labor laws as employees. However, Illinois does not have an exemption similar to the Maryland exemption previously referenced for the purpose of ensuring compliance with securities or financial law or regulatory requirements. In Illinois, this independent contractor exception appears to be the only way an investment adviser could request access to an investment adviser representative’s personal social media accounts.  In other words, current Illinois law does not appear to allow an investment adviser to request access to personal social media accounts of an investment adviser representative that is classified as an employee.

A U.S. Securities Exchange Commission representative confirmed that the federal rules promulgated under the Investment Advisers Act of 1940 do not pre-empt the state privacy laws. She said that the investment adviser has a choice to allow its investment adviser representatives to use social media sites for business purposes. If it does so, the investment adviser has the responsibility to make sure it can retain records of business related interactions under SEC Rule 204-2, which includes requesting access to the account, when necessary.

Considering that many states have similar privacy laws on the docket, this is an issue that investment advisers need to keep an eye on. Stay tuned to RIA Compliance Consultants for updates on these privacy laws.

Posted by Bryan Hill
Labels: Privacy, Record Keeping, Social Media