Ethics and Social Media: Four Key Considerations for Investment Professionals
Social media has arrived in the investment management industry, and it is changing the way that investment professionals conduct business. Social media is the ultimate integration of technology, interpersonal interactions, and content. Facebook, LinkedIn, and Twitter, for example, allow investment professionals to develop and/or maintain clear and frequent communications with clients, prospective clients, and peers. Blogging enables investment professionals to educate as well as promote their services to a broader and more diverse audience in a more timely and cost-efficient manner. Although social media offers myriad opportunities and benefits, it also comes with both risks and responsibilities for its users.
In the United States, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have been proactive in providing guidance to the investment industry about the use of social media in order to ensure compliance with U.S. securities laws (Securities Act of 1933, Securities and Exchange Act of 1934, and Investment Advisers Act of 1940). The SEC’s broad definition of social media includes “blogs, microblogs, wikis, photos and video sharing, podcasts, social networking, and virtual worlds.”
The directives issued by FINRA and the SEC can also provide guidance to CFA members and candidates in all jurisdictions to help to ensure that their social media activities are in compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct. This is especially important because many countries may either not have rules and regulations governing the use of social media or the rules may be in a nascent stage of development. As Standard I(A) states: “Members and candidates must not engage in conduct that constitutes a violation of the Code and Standards, even though it may otherwise be legal.” The Code and Standards goes on to say that “in the absence of any applicable law or regulation or when the Code and Standards impose a higher degree of responsibility than applicable laws and regulations, members and candidates must adhere to the Code and Standards.”
Therefore, before taking the plunge into social media, it is important for investment professionals and their firms to think about the content of any communications, the use of third party information, record retention, and supervisory policies.
The primary benefit of social media is that it allows investment professionals to communicate with clients, prospective clients, and peers easily and effectively. However, this is also the primary risk. Investment professionals need to be very careful about what they blog, tweet, or post on Facebook, because it could be interpreted as investment advice, which in turn could raise issues of suitability, diligence, and prudence. In addition, investment professionals must be careful not to make statements that could be perceived as false or misleading. The Standards of Practice Handbook (SOPH) defines misrepresentation as “any untrue statement or omission of a fact or any statement that is otherwise false or misleading.”
The SEC and FINRA consider professional profiles that are posted on LinkedIn as webpages. According to the SOPH, investment professionals who use webpages are responsible for regularly monitoring the material posted on them to ensure that “all reasonable precautions have been take to protect the site’s integrity and security and that the site does not misrepresent any information and does provide full disclosure.” In its review of the social media websites of investment advisers, the SEC found that the majority prohibited the posting of recommendations or the posting of information on products or services.
Investment professionals must be vigilant if they allow third parties to post messages, articles, and other information on their social media websites. Under Standard I(C), investment professionals are responsible for misrepresentations resulting from the use of the credit ratings, research, testimonials, or marketing material of outside parties. To reduce this risk, some firms either limit what third-party content can be posted on their site or they only allow their employees to post information on their site.
The SEC staff believes that the use of such social plug-ins as the “like” button could be considered a testimonial (a statement about a client’s experience with an investment adviser or an endorsement of an investment adviser) and is therefore a violation of the Investment Advisers Act of 1940, which prohibits publishing or distributing advertisements that directly or indirectly refer to testimonials concerning an investment adviser.
FINRA prohibits firms from providing links to third-party sites that it knows or has reason to believe contain false or misleading information. In addition, FINRA holds firms responsible for the content on a linked, third-party site if the firm has endorsed its content or participated in its development.
Record Retention Policies
Firms are required by FINRA and the SEC to retain all business related communications conducted via social media. These communications must be retained for a specified period of time and be available for inspection. For example, firms and investment professionals need to think about how they are going to keep a record of all business communications made via Facebook, LinkedIn, or Twitter. The good news is that the SEC allows firms to hire third parties to manage social media communications.
Similarly, under Standard V(C) of the SOPH, investment professionals are required to develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients. In addition, they must retain records (either electronically or in hard copy) that substantiate the scope of their research and the reasons for their actions or conclusions. The standard goes on to say that local regulators often impose their own record retention requirements on investment professionals and firms, which must be followed and which may also satisfy the requirements of Standard V(C). In the absence of regulatory guidance, CFA Institute recommends maintaining records for at least seven years. Although it is the firm’s responsibility to maintain records that support investment action, CFA members and candidates should still archive their own research notes and other documents that support their investment-related communications.
At the very least, firms should review their record retention policies to ensure that they are in compliance with all applicable laws, rules, and regulations. They should also ensure that all employees are complying with these policies.
Proper supervision is the key to reducing the risks posed by the use of social media. In reviewing how firms use social media, the SEC found that many firms have overlapping policies about advertising, communicating with clients, and the use of electronic communications, and that these policies often don’t specifically include social media. In addition, many policies were not specific as to which types of social networking activities were not permitted. Therefore, the SEC recommends that firms reevaluate their internal controls and policies to see if they address any conflicts and compliance factors that are creating risks for the firm.
According to Standard IV(C) of the SOPH, investment professionals must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority. This means that firms must not only establish and implement written compliance procedures but also ensure that those procedures are being followed by monitoring, enforcing, and periodically reviewing them.
The SEC recommends that policies and procedures concerning the use of social media address the following issues:
- Usage guidelines: How will social media be used? Which social media sites should be approved for use? Which functionalities can and cannot be used on each approved social media website?
- Content standards: What can and cannot be communicated or posted on social media sites? What content or information should be prohibited or restricted?
- Monitoring: Who will monitor the approved social media sites? How will they be monitored? How often will they be checked?
- Approval of content: Who will be responsible for approving social media content before it is posted?
- Participation: Who will be allowed to participate on a social media site? What is the criteria for participation?
In addition, firms should consider who owns social media profiles and contacts. As more firms use social media platforms to communicate with clients, the line between what belongs to the firm and what belongs to the individual employee has become increasingly blurred. CFA Institute is working to address this question as it revises the 11th edition of the SOPH.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.