More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- 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.
While many advisory firms are avoiding using Facebook, LinkedIn and Twitter for marketing purposes until they receive more clarity from regulators on how to use these social media outlets, others are exposing themselves to possible regulatory actions, says Sheri Mushel, president and CEO of RIA Registrar.
As Mushel helps her RIA clients get ready for Securities and Exchange Commission (SEC) exams, which she says are on the rise, she reminds them that using Facebook, LinkedIn and Twitter is “considered advertising.” RIA Registrar is a Minnesota-based consulting firm offering regulatory, compliance and registration support for advisors.
One particular issue for advisors using LinkedIn, she says, is that they may inadvertently get testimonials from other people, which counts as advertising. This, she says, could get a firm dinged. To remedy this problem, Mushel suggests advisors “uncheck” the box showing referrals on LinkedIn so testimonials don’t show up.
Another challenge in using social media sites like Facebook when it comes to SEC exams is retention of files. How does one retain files with ever-changing Facebook pages and posts?, she asks. More and more companies are popping up offering Facebook retention services, Mushel says. “Some [larger] firms are dipping their toes in the [social media] water,” she says, but “other firms with five or six people are saying, ‘We are going to wait until there are clear guidelines.’”
(Among those larger firms: Morgan Stanley, which has given 600 brokers access to Twitter and LinkedIn to begin; Raymond James, which announced its new policy at its annual conference; and independent BD Commonwealth Financial.)
Mushel counsels advisors using Facebook to change the settings so the only posts that appear “are ones you post to your own page, so you have complete control, or you can choose which advisors’ posts you want to show up on your Facebook Wall.”
Michael McGlashen of Bucks County Financial Planning Group, a fee-only financial planning firm in Pennsylvania and a client of Mushel’s who is now opening up an office north of Los Angeles, is one such advisor who’s moving slowly into the social media realm. Most of his clients come from referrals and although he does have a Facebook page, he doesn’t let the “outside world” see it. “I don’t advertise there,” he says.
(The SEC and FINRA have been busy on other fronts lately. See this June 2 article on the two regulators' warning on structured notes; and this June 2 article on FINRA's recent fines against Merrill Lynch, Northern Trust, and Credit Suisse.)
According to a recent white paper by Advanced Regulatory Compliance Inc. called Navigating the Social Media Storm, the SEC circulated a Sweep Exam Letter outlining document requests pertaining to social media. The main themes addressed in the letter are: Retention of social media documents; policies and procedures concerning social media; third party use of Social Media and how it relates to the firm; supervision of representatives’ personal use of social media and disciplinary actions.
Mushel says she believes that most social media rules would likely be broken by advisors inadvertently, with the penalty levied depending on how the rule was broken. “If it was something that could have been avoided fairly easily, there will be a stiffer penalty,” she says. Usually, she has found with advertising compliance shortfalls, the SEC will issue a deficiency letter explaining what the agency doesn’t like about the method of advertising and, what needs to be changed.