Views on improving the integrity of global capital markets
25 January 2012

To Tweet or Not to Tweet: Social Media Rules in a State of Flux for U.S. Investment Advisers

Developments over the last several months have shown just how uncertain regulatory schemes are when it comes to addressing the use of social media. It has left advisers and investors with a range of questions, but few regulatory answers.   

Much of the confusion stems from early January, when the SEC charged an investment adviser with participating in a social media scam. The SEC claimed the adviser was offering more than $500 billion in fictitious securities through social media outlets, particularly LinkedIn. Vowing to “pursue fraudulent activity on new and evolving platforms,” SEC staff used the opportunity of announcing its enforcement action to also release two publications for investors — an Investor Alert titled “Social Media and Investing: Avoiding Fraud” and an Investor Bulletin titled “Social Media and Investing: Understanding Your Accounts.”

Rules Remain Murky

But investors are not the only ones who may need help in navigating the social media world. While the SEC action brought against an adviser offering fictitious securities is a pretty obvious misdeed, those seeking to use social media sites responsibly may lack adequate guidance under the current structure.   What advisers and other users of online forums must specifically do in order to meet regulatory requirements and compliance standards remains unclear.  

In the recently issued “National Examination Risk Alert — Investment Adviser Use of Social Media,” SEC staff advise that advisory firms using social media to communicate with clients should review their requirements under Rule 206(4)-7 of the Investment Advisers Act of 1940 with respect to adopting and reviewing appropriate policies and procedures. The Risk Alert also reflects SEC “staff observations” on the policies and procedures firms are using in the social media arena and provides a “non-exhaustive list of factors than an investment adviser may want to consider when evaluating the effectiveness of its compliance program with respect to firm, IAR or solicitor use of social media.” 

Advisers that are dually registered with the Financial Industry Regulatory Authority (FINRA) and the SEC seemed to have a clear roadmap for the evolving regulatory scheme of social media rules. In January 2010, FINRA had posted  Regulatory Notice 10-06 providing guidance on blogs and social networking websites, followed by Regulatory Notice 11-39 in August 2011 on social networking websites and the use of personal devices for business communications.  

Since then, however, revisions to the regulatory scheme and related filing requirements have followed a rather convoluted path. In July 2011, FINRA proposed a new Rule 2210 that would revise its regulation over member communications and hopefully settle the debate over whether online communications constituted a “public appearance” or “correspondence” under its rules.  Currently, the public appearance category includes “participation in a seminar, forum (including an interactive electronic forum), radio or television interview, or other public appearance or public speaking activity.” Yet, this new rule proposal, which was followed by FINRA’s Partial Amendment No.1 in late October  2011 and Partial Amendment No. 2 in late December 2011, now proposes to “classify online interactive forum posts generally to be retail communications rather than public appearances” and be subject to a new “filing exclusion for retail communications that are posted on online interactive electronic forums.”  Nonetheless, such an exemption would not serve as a pass for advisers under federal law or SEC rules.  While the SEC must ultimately approve final changes to FINRA rules, it has yet to sign off on this approach.

What’s an adviser to do? Even if this new FINRA rule is implemented and advisers know for awhile the requirements for using online vehicles for communications with clients, as surely as social media usage takes a new turn, new compliance issues requiring new regulatory rules will emerge. Posting that letter in the mail has just started to look like the easier and less time-consuming path.

About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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