Ongoing Compliance Concerns with Social Media Use

Rule 206(4)-1 under the Investment Advisers Act of 1940 prohibits any investment adviser (“IA”) from  directly or indirectly publishing, circulating or distributing any advertisement that: (i) contains or refers to a testimonial regarding the IA or past recommendations of such IA, (ii) represents that a graph, chart or other device can be used to determine which securities to buy/sell or when to buy/sell such securities, (iii) represents that any report or service is free of charge unless such report or service actually is entirely free and without any condition or obligation; or (iv) contains any untrue statement of material fact, or which is otherwise false or misleading.

More and more IAs are using social media for advertising and due to the interactive nature of some of the sites, managing control of content for adherence with Rule 206(4)-1 can be quite challenging for compliance personnel. In the risk alert released by the SEC in January 2012 the staff provided guidance and certain compliance steps to consider when using social media for business purposes, such as analyzing the risk exposure to firm and clients and implementing written procedures, including but not limited to pre-approval of content, usage guidelines, content standards, monitoring, and employee training.

Important controls that IA compliance personnel  might want to consider include prohibiting employees and solicitors from mentioning the firm or its services on their personal social media sites, and requiring all employees and solicitors to make an attestation that they will adhere to the firm’s social media policies and procedures at all times. In addition, compliance personnel should conduct general internet searches to find any social media sites that make reference to their firm, or any pages that are linked to their firm’s employees. It is up to each IA firm to decide what steps and controls are appropriate to deal with social media use; however, the SEC has made it fairly clear that IA compliance programs must include policies and procedures regarding the firm’s use of social media and be extensive enough to ensure that the firm’s social media use does not violate any federal securities laws, including Rule 206(4)-1.

For additional information regarding social media compliance or any other compliance topic, please contact andrew.deddeh@corecls.com or by phone at (619) 278-0020.