More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- 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.
Many practice management gurus recommend that advisors use social media, but actually doing so with an eye toward managing the risks inherent in social media is not such an easy task, argues Tim Welsh. Moreover, social media also carries a client risk. “If you have clients using Twitter, Facebook and LinkedIn,” says Patrick Burns, you’d better be using them yourself, if you want to be “communicating with them on the same level.”
Burns, president of Advanced Regulatory Compliance Inc., in addition to being the managing attorney at the law firm of Patrick J. Burns, and Welsh, founder of the advisor consulting firm Nexus Strategy, have published a white paper that explores the risk management issues of social media, includes a history of the media and limns the SEC’s current (if amorphous) approach to regulating social media.
The paper argues that “ignoring growing social media related compliance issues is a gamble and can leave your firm exposed to the risk of administrative penalties, reputational harm, or worse.” As for business opportunities, the paper says that “the rise of social media as the way people and businesses communicate will not stop and it will be the progressive firms that adapt to this new paradigm to create a long-term, competitive advantage.”
Burns (left) says that many advisors are wondering what, exactly, they should be doing to be compliant with the somewhat unclear messages the SEC is sending to advisors on social media. The SEC is also said to have sent our sweeps letters to some advisors asking to see documents related to their use of Facebook, Twitter, LinkedIn, Flickr, YouTube, and blogs. The sweeps letters purportedly also ask advisors to explain what the advisory firm’s policies and procedures are with respect to social media.
So what should advisors do? Burns suggests that advisors treat social media as they already do email, on which the SEC has also never gotten around, “after seven years,” he notes wryly, to finalizing specific rules, though every firm knows it must capture and archive all emails and produce those documents to examiners on demand. So on social media, says Welsh, “capture it at the source, and be able to produce on demand, for instance, ‘All your tweets from March 9.’”
The white paper—Navigating the Social Media Storm—recommends capturing social media activity through Enterprise Content Management (ECM) systems “as well as specific applications that are integrated into the major social networking sites” through Application Programming Interfaces (APIs) provided by the major social media sites. Welsh says he and Burns have “postulated that it would be great for someone to develop” a technology tool that could interact with an advisor’s CRM system to capture, monitor and then produce on demand all those archived tweets and Facebook status updates.
Burns says that while he can’t recommend specific technology tools to help advisors comply, Erado was one such firm that arose during his research on social media. The independent broker-dealer Commonwealth Financial announced last week that it is using Erado’s
Message Control application that will provide Commonwealth reps with pre-approved Facebook and Twitter messages. In an interview with Erado’s CEO Craig Brauff on AdvisorOne last week discussing the Commonwealth announcement, Brauf said there will be a “flurry of announcements similar to Commonwealth’s in the next 30 to 45 days involving roughly 25 of the top independent broker-dealers.”
What is the SEC concerned about, specifically, when it comes to advisor use of social media? Burns suggests advisors should focus on what the SEC already is worried about on advisor websites and marketing material: testimonials, especially from current clients, and advertising specific investment recommendations.
“At a time of uncertainty,” says Welsh, “you have to navigate” a safe path for yourself and your firm on social media. For guidance, the white paper suggests advisors could do worse than to look at what other regulators are doing. FINRA, for instance, released specific guidelines last year on how broker-dealers and BD reps must handle social media. The purported sweeps letter contained in the white paper suggests that each advisor should have a social media policy as part of its overall policies and procedures documentation.
“If the SEC wanted to get creative,” notes Burns, examiners “could bring a case that this is part of your books and records” that advisors must maintain under ’40 Act. So is waiting for clearer SEC guidance a good policy? “Definitely not,” says Burns. He suggests that you may not want to be that “unlucky” advisor over whom such a case is made by the SEC. Burns suggests as well that advisors should make sure that anyone in the firm with a personal Facebook page or LinkedIn account does not use company equipment to maintain those pages, and that the firm set up separate social media accounts for the business.