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Love or Hate Social Media, Advisors Need to Be Compliant

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What You Need to Know

  • Social media creates compliance risk for firms.
  • The SEC says it is interested in learning how firms and advisors use so-called gamification tools.
  • Firms need to create strategies to monitor employees effectively.

There seems to be no in-between when it comes to social media: You either love it or hate it. There is, however, very little debating the fact that its use creates risks for firms.

Perhaps the most glaring example is personified by Keith Gill, the trader who helped lead the meme stock charge under the pseudonym “Roaring Kitty.”

In helping to drive up the price of GameStop and others, he recorded hundreds of YouTube videos, tweeted and often posted on Reddit’s infamous WallStreetBets forum, all while being a financial services employee.

Last month, his former company paid the price, literally, agreeing to a $4.75 million settlement with Massachusetts regulators for failing to supervise him and, notably, for compliance failures that were systemic and “not unique to Gill.”

Social Media Marketing Issues

A less extreme but still problematic example is the headaches created by social media marketing. Truthfully, advisors and firms leveraging the likes of TikTok, Twitter, Instagram and Facebook have always kept compliance officers up at night. Yet, those worries have multiplied in recent months.

Many within the industry see the crowd of retail investors who flocked to low-cost trading platforms to buy and sell stocks during the pandemic as a ripe business opportunity. And in their mind, the key to reaching this group is social media.

The regulators have taken notice.

Recently, FINRA has said firms could be subject to social media sweeps. As part of that process, it will look into how firms leverage online influencers to promote their brands.

Meanwhile, the Securities and Exchange Commission recently requested comment related to “digital engagement practices,” saying it is interested in learning how firms and advisors use so-called gamification tools.

Therefore, firms should be prepared. Here’s what they need to know:

More on this topic

Follow all current electronic record retention rules. This may seem manifestly obvious, but a surprising number of firms are not doing this in today’s rapidly expanding digital environment. It’s critical to capture and archive every business communication, whether it’s an email, tweet, text, instant message via social media or workplace collaboration tools like Zoom or Teams.

Prohibition is not enough. Even if firms prohibit certain tools and platforms, they still need policies and procedures to detect and monitor user activity and demonstrate that the policy is effective.

The approach needs to reflect the reality that employees and affiliated advisors will continue to use social media applications even after firms ban them.

Create strategies to monitor employees effectively. Firms need to be able to red-flag keywords and phrases such as “Facebook chat,” “DM me,” “my TikTok video” or “let’s take this offline.”

This helps to minimize potentially high-risk communication. To supplement this, employees should undergo regular training to make sure they are always aware of the most current policy guidelines.

Constantly review electronic communications recordkeeping and supervisory policies. At a minimum, identify the reviewers, describe the process for each review — including the timing and frequency of each review — and spell out how reviewers document that they followed the required supervisory steps.

Most importantly, enforce the policies. While many do, some do not.

Love or hate social media, firms must monitor, capture and archive its data — just like any other business communication.

The good news is that even as advancements in technology are changing how firms and advisors interact with would-be clients, parallel enhancements are taking place in the archiving industry to help them keep up with their compliance and supervisory procedures. Because of this, it’s become easier than ever to guard against potential violations.


Marianna Shafir is regulatory advisor at Smarsh, which provides digital communications compliance technology to financial services firms.