More On Legal & Compliancefrom The Advisor's Professional Library
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
When social networking Web sites such as Facebook, Twitter, and MySpace began, they were devoted to the musings of like-minded individuals--often students--or the following of celebrities, or even, in the case of LinkedIn, professional networking and even job hunting.
But social media have evolved to include marketing, branding, corporate communications of all kinds, and customer relations--even being, in some cases, the easiest way for consumers to reach corporate attention over complaints or problems unresolved through more conventional means. And as they've grown more complex, the need to consider compliance issues for all communications on social media has grown from mere prudence to a necessity.
In January, FINRA issued Regulatory Notice 10-06, "Social Media Web Sites: Guidance on Blogs and Social Networking Web Sites"; while the need for compliance on the Web is not exactly new (in 2003, FINRA declared that if an advisor participated in a chat room on the Internet, what he said was "subject to the same requirements as a presentation in person before a group of investors"), as social media have matured, the need to both monitor and control what advisors and employees say online has grown, and the question of how to do so can be challenging to answer.
A recent white paper by Osterman Research and sponsored by LiveOffice points out that many of the communications issued on social media contain business records, which are subject in the case of government to sunshine laws and, of course within the financial industry, to compliance.
Advisors may not necessarily think of a blog posting or a tweet as a business record, but, according to a white paper by Socialware, "The Companion Guide to FINRA/SEC Social Networking Compliance," (the Regulatory Notice and the white papers or links to them can all be found at InvestmentAdvisor.com), it can be considered advice or marketing material, depending on the content and the number of people it goes to. Information on publicly available Web sites, says the white paper, are considered advertisements; password-protected sites fall into the category of sales literature, and a chat room discussion is considered a public appearance.
Content Used in Court
It's not just a matter of making sure that communications that can be construed as investment advice are monitored. Content from social media sites has been used in court cases as evidence and has cost employees jobs and companies their reputations--consider the Domino's Pizza incident, in which two employees were charged with a felony after posting a YouTube video of themselves adulterating food at a Domino's in North Carolina, and the Ohio Petland incident, in which an employee posted a gruesome photo of herself on Facebook with two drowned rabbits that she allegedly was responsible for. Both drew unfavorable national attention for the parent companies. An employee who posts about proprietary information or who alleges wrongdoing can cause an abundance of trouble.
The need to maintain archives that will preserve what has been broadcast via social media is now a necessity. Not only that, but companies often do not even have a policy in place concerning the use of social networking sites, who may access them, and what may be posted there. Numerous software solutions are now on the marketplace that offer various solutions and degrees of monitoring and archiving.
Companies that have hesitated to jump into the social media pool might want to reconsider. Investor Relations Global Rankings (IRGR), in its IR Social Media Study released in July, says that the use of Web 2.0 (the concept of using the Web as a platform for sharing information) by companies in the U.S. has grown from 13% in 2009 to 27% in 2010; growth rates are even faster in other regions of the world, although the U.S. has the highest percentage. According to the study, social media make a difference by enabling new means of communication between companies and the public, and sites such as Seeking Alpha and StockTwits offer investors new ways of gathering information on companies that pique their interest.
With FINRA issuing regulations and offering Webinars on the subject, and software firms providing ways to monitor and control information to comply with those regulations, the issue is one that will challenge advisors for some time to come.