On the heels of the social media alert issued by the staff of the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”1), the Massachusetts Securities Division (“Division”) has issued a report of its own dealing with regulatory issues raised by investment advisers’ use of social media2. While the Division’s alert applies only to state-registered advisers, the guidance offered is instructive as it demonstrates the range of views and approaches that are emerging on this important topic. Moreover, since the state retains jurisdiction over all advisers when investigating allegations for fraud, federally registered advisers conducting business in Massachusetts should be aware of this guidance.
Applicability of Advertising Requirements. The Division stated that, depending on the facts and circumstances, a social media posting could be deemed an advertisement and as such would be subject to state advertising and recordkeeping requirements. Advisers were also cautioned that a LinkedIn “recommendation” can place third-party material on an adviser’s site and that adviser may wish to ban recommendations to avoid them being deemed prohibited testimonials (most states have adopted rules like Rule 206(4)-1 of the Investment Advisers Act of 1940 (“Advisers Act”)). The Division concluded, however, that, by itself, a Facebook “like” “does not constitute a testimonial.” This would appear at least partly at odds with the OCIE staff’s guidance, which indicated that Facebook “likes” may be deemed a testimonial depending on the facts and circumstances. The Division shared a sample disclosure for a firm’s Facebook page that could be used to avoid classification as a testimonial:
“Likes” should not be considered a positive reflection of the investment advisory services offered by [Investment Adviser]. Visitors to this page must avoid posting positive reviews of their experiences with the adviser or its services as such testimonials are prohibited under state and federal securities laws and may not reflect the experience of all clients of [Investment Adviser].
The Division also cautioned against cherry-picking performance results and opined that Twitter, with its limited character count, “may be an inappropriate medium” for sharing performance results.
Supervision and Monitoring. Advisers are also obligated to monitor the use of social media by the firm and its representatives. The Division stated that a best practice for compliance staff is a periodic review of the online material. The Division further stated that “a review done daily would be considered a reasonable supervision of the adviser’s social media site. Less frequent reviews may be reasonable depending upon the traffic on the site and the type of social media site (i.e., Twitter vs. LinkedIn).” Advisers were further cautioned to develop policies and procedures that maintain a schedule for review of third party posted content and, if the adviser chooses to remove content, criteria for removal.
Recordkeeping. The Division confirmed that social media postings are subject to state recordkeeping requirements if they are deemed to be advertising or communications (akin to an email communication). The Division stated that it observed that many advisers were not adequately retaining social media records and that vendor recordkeeping solutions were becoming more available.
Third-Party Posts. The Division’s alert went further than the SEC staff’s alert in assessing an adviser’s potential responsibilities for content posted to an adviser’s social media by a third party. The Division’s alert incorporated the entanglement and adoption theories used by the Financial Industry Regulatory Authority (“FINRA”). As applied to advisers, an adviser can become entangled and thus responsible for a third-party posting on a website or social media if the adviser has in some way been involved in the content’s creation or preparation, while an adviser may adopt third-party content by in some way explicitly or implicitly (through its actions) approving or endorsing the content after it was created.
The Division warned that an adviser will be held responsible for the substance of content that it is entangled with or which the adviser has adopted. States retain enforcement authority over investment advisers in matters of fraud or deceit and as such could bring an enforcement action against an SEC-registered adviser that had adopted or become entangled with a third-party posting that was deemed to be fraudulent.Examples of entanglement and adoption provided by the Division include:
The Division encouraged firms to develop policies and procedures for scheduling reviews of third-party posts and criteria for removing them. The Division also warned that independent pages run by representatives also could be classified as advertisements and need to be monitored.Conclusion
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1 The Bingham alert on the social media alert issued by OCIE is available at /Media.aspx?MediaID=13316
2 The Division’s report on the use of social media by investment advisers is available on the Division’s website at http://www.sec.state.ma.us/sct/sctmediasurvey/socialmedia.pdf