More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
Social media: Those two words have become ever present in our daily lives and it’s safe to say that, to some extent, a good portion of us use a social media outlet on a daily basis.
While some advisors remain skittish on social media use, others are jumping in full force. Marla Bace, chief marketing officer at Brinton Eaton, a wealth advisory firm in Madison, N.J., says advisors see social media as the latest “must understand” to grow their business.
Yet others are finding ways to exploit social media tools with evil intent. Case in point: The SEC on Jan. 4 charged an Illinois-based advisor with offering to sell fictitious securities on LinkedIn.
The SEC’s Division of Enforcement alleged that Anthony Fields of Lyons, Ill., offered more than $500 billion in fictitious securities through various social media websites. For example, the SEC says he used LinkedIn discussions to promote fictitious “bank guarantees” and “medium-term notes.” The postings resulted in interest from multiple purported potential buyers.
The SEC’s order instituting administrative proceedings against Fields says that he made multiple fraudulent offers through his two sole proprietorships—Anthony Fields & Associates and Platinum Securities Brokers. Fields, the SEC says, provided false and misleading information concerning AFA’s assets under management, clients and operational history to the public through its website and in SEC filings. He also failed to maintain required books and records, did not implement adequate compliance policies and procedures, and held himself out to be a broker-dealer while he was not registered as such with the SEC.
Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), warned in announcing the charge that as investment advisors increasingly utilize social media to communicate with clients and potential clients, “firms need to be mindful of the applicable standards governing those communications.”
Alerts From the SEC
On the same day in early January, the SEC released a National Examination Risk Alert titled “Investment Adviser Use of Social Media,” which provides SEC staff observations based on a review of investment advisors of varying sizes and strategies that use social media. In growing numbers, the SEC says, registered investment advisors are using social media to communicate with existing and potential clients, promote services, educate investors and recruit new employees.
The alert reviews concerns that may arise from use of social media by firms and their associated persons, and offers suggestions for complying with the antifraud, compliance and recordkeeping provisions of the federal securities laws. The alert notes that firms should consider how to implement new compliance programs or revisit their existing programs “in the face of rapidly changing technology.”
The SEC’s Office of Investor Advocacy also issued an Investor Alert titled “Social Media and Investing: Avoiding Fraud,” designed to help investors be better aware of fraudulent investment schemes that use social media, and provides tips for checking the backgrounds of advisors and brokers.
Finally, the agency released an Investor Bulletin titled “Social Media and Investing: Understanding Your Accounts,” which contains best practices on privacy settings and password selection along with security tips aimed to help social media users protect their personal information and avoid fraud.
The Benefits to Advisors
Russell Dunkin, a wealth advisor in Wheeling, W.V., told me in an email that in his use of social media over the past four years, he’s found Facebook to be “extremely valuable” in deepening his existing client relationships and “accelerating relationships that are just forming.”
Says Dunkin: “Knowing tidbits about friends generally leads me to know more about them. Second, it accelerates relationships that are just forming. Several of my close friends and business networks today started as simple introductions and accelerated through either Twitter or Facebook.” By connecting online, he says, “Often I’ll get to know [potential clients] better and faster, leading to more meaningful relationships later.”
However, Dunkin says he doesn’t rely solely on Twitter, for instance, as a means to generate new business, adding that it takes more than one method of marketing and communication to fill a referral pipeline.
Alan Moore, a fee-only advisor with Financial Service Group Inc. in Racine, Wis., told me that he also does not expect a potential new client to find his firm via his Twitter feed. However, he said, “properly using social media helps to drive up [his firm’s] Google rankings, which is where most of our clients come from, second only to referrals from current clients.”
Moore says he started using social media about a year ago and, so far, has been “very happy with the results.” But he recommends that other advisors take his lead and separate each social media tool—Facebook, Twitter and LinkedIn—into one of three categories:
• A personal account for personal use
• A personal account for business use
• A business account for business use
“I chose to have my personal Facebook account remain personal, while also being an administrator for our company Facebook page,” Moore says. “LinkedIn and Twitter can go into the second option as well. I find it impossible to cross personal use and business use with the same account, and have chosen to keep them clearly separated. My Twitter and LinkedIn accounts focus on building relationships in financial planning; my Facebook account focuses on personal relationships.”
That being said, he reports having had great success networking with peers and keeping up to date with changes in the financial planning profession using Twitter and, to a lesser extent, LinkedIn.
As far as where he gets his news, Moore says he gets the majority from other professionals reposting articles or blog posts that they felt were relevant.
Advisors using Twitter, he notes, tend to be very willing to share thoughts and opinions on a wide range of topics, including their own firm’s practice management. “I can ask a question as simple as ‘Who is using both technology A and technology B?’ And, ‘How is it working for you?’ I can get several responses within a few hours.”
To be sure, as the new year unfolds, more and more advisors will choose to dip their feet further into the social media waters. But caution should be taken in doing so. As Robert Kaplan, co-chief of the SEC Enforcement Division’s Asset Management Unit said, the charge against the Illinois advisor for LinkedIn fraud “reflects our determination to pursue fraudulent activity on new and evolving [social media] platforms.”