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SEC Office of Compliance Inspections and Examinations Issues Risk Alert on Investment Adviser Use of Social Media

January 9, 2012

 

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) recently published a national examination risk alert relating to investment adviser use of social media. OCIE noted that registered investment advisers are increasingly using social media to communicate with existing and potential clients, promote services, educate investors, and recruit new employees. OCIE emphasized that advisers’ use of social media must comply with federal securities laws, and accordingly, that advisers should adopt and periodically review the effectiveness of policies and procedures regarding social media, paying particular attention to issues relating to third-party content and recordkeeping responsibilities. OCIE’s risk alert is available here.

Effective Compliance Procedures Pursuant to Advisers Act Rule 206(4)-7

OCIE expressed concern that many advisers’ compliance procedures are not specifically tailored to social media or do not make clear what standards apply to social media use. OCIE identified a non-exhaustive list of factors that investment advisers should consider when evaluating the effectiveness of their compliance programs with respect to use of social media. Among others, these factors include:

  • Usage Guidelines and Functionality. Providing, for example, an exhaustive list of approved social media networking sites and identifying functionalities that the adviser’s representatives and solicitors are prohibited from using based on an analysis of legal risk to clients and potential for breaches of privacy.
  • Content Standards and Content Pre-Approval. Providing, for example, clear guidelines with respect to content that contains investment recommendations or information on specific investment services or investment performance, and potentially requiring pre-approval for certain content.
  • Monitoring. Implementing policies to monitor adviser and solicitor activity on social media sites, with the frequency of monitoring based on the volume and pace of communications posted on a site and the likelihood of the subject matter discussed to be interpreted as misleading.
  • Information Security. Reviewing security procedures to ensure protection against elevated risks posed by social media.

Management of Third-Party Content

OCIE explained that the ability of third parties to post content on an adviser’s social media site poses special problems with respect to federal securities laws, and highlighted the issue of testimonials. Rule 206(4)-1(a)(1) of the Advisers Act prohibits the publishing or distributing of advertisements that directly or indirectly refer to testimonials concerning an investment adviser. OCIE explained that SEC staff have consistently interpreted testimonials to include a statement of a client’s experience with, or endorsement of, an investment adviser. Under such an interpretation, the use of “social plug-ins” such as the “like” button could constitute a prohibited testimonial.

Recordkeeping Responsibilities 

OCIE emphasized that Advisers Act recordkeeping obligations do not differentiate between various media, and that they apply equally to e-mails, instant messages, and other internet communications relating to an advisers’ recommendations or advice. The content of the communication, not its form, is determinative. Accordingly, OCIE recommended that advisers review their document retention policies to ensure that any required records generated by social media communications are retained in compliance with federal securities laws, and that such records remain readily accessible for at least five years.

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Registered investment advisers should have a comprehensive set of social media policies and procedures. O’Melveny & Myers LLP is available to assist advisers in developing social media policies and procedures or in reviewing current policies and procedures. For questions, please contact the attorneys listed above or any other O’Melveny & Myers LLP attorneys with whom you ordinarily work on related matters.