On January 4, 2012, the staff of the SEC’s Office of Compliance Inspections and Examinations issued a National Examination Risk Alert (the “Risk Alert”) with observations related to the use of social media by registered investment advisers (“advisers”). The Risk Alert, citing the accelerated use of social media by advisers, investment advisory representatives and solicitors, indicates that, pursuant to Rule 206(4)-7 under the Investment Advisers Act of 1940 (the “Advisers Act”), advisers should adopt, and periodically review the effectiveness of, policies and procedures relating to the use of social media. The SEC staff issued the Risk Alert following a review of certain advisers’ use of social media to evaluate whether their use complied with the federal securities laws. In this regard, the Risk Alert emphasizes that the “use of social media must comply with various provisions of the federal securities laws, including, but not limited to, the antifraud provisions, compliance provisions and recordkeeping provisions.”
Evaluating Compliance Program Oversight of Social Media. The Risk Alert offers a “non-exhaustive list of factors that an [adviser] may want to consider when evaluating the effectiveness of its compliance program with respect to the firm, [investment advisory representative] or solicitor use of social media.” The Risk Alert describes, among other factors, usage guidelines, content standards, monitoring, training and content approval. The Risk Alert emphasizes that the factors it describes should be tailored to the specific profile of the adviser and consideration should be given to other appropriate factors. For example, the frequency with which a firm monitors activity on social media sites will be determined by its specific facts and circumstances. The Risk Alert suggests that “using a risk-based approach, a firm may conclude that periodic, daily or real-time monitoring of the postings on a site is appropriate.” Advisers should also consider whether to require pre-approval of all postings to social media sites, or to allow for after-the-fact review.
Third Party Postings. The Risk Alert also addresses third-party use of an adviser’s social media site. The staff noted that, based on its review, there were varying approaches in firm policies and procedures governing third-party postings. Some of the more conservative policies and procedures limit third-party postings and prohibit postings by the general public, while others include disclaimers on the social media site that the adviser does not approve or endorse any third-party post. The key issue with respect to third-party statements is whether such statements could be “testimonials” subject to the limitations of Rule 206(4)-1(a)(1) under the Advisers Act. The Risk Alert provides that the staff has consistently interpreted that term to include a statement of a client’s experience with, or endorsement of, an investment adviser. Applying this standard to the social media context, the Risk Alert notes, “[t]herefore, the staff believes that, depending on the facts and circumstances, the use of ‘social plug-ins’ such as the ‘like’ button could be a testimonial under the Advisers Act” and that “[i]f, for example, the public is invited to ‘like’ an [investment advisory representative’s] biography posted on a social media site, that election could be viewed as a type of testimonial prohibited by Rule 206(4)-1(a)(1).”
Recordkeeping and Social Media. The Risk Alert also discusses the applicability of the Advisers Act’s recordkeeping requirements to an adviser’s use of social media, noting that the Act’s recordkeeping provisions do not differentiate between various media. Therefore, according to the staff, an adviser that communicates through social media should determine that it has the ability to retain all required records related to social media communications and make them available for inspection.