Tuesday, January 24, 2012

Massachusetts Provides Guidance on Social Media Use by Investment Advisers

Investment advisers that discuss business with existing or prospective clients on any of the 21st Century Internet platforms for socializing, e.g., facebook, twitter or LinkedIn, must be aware that their communications may be subject to state regulation, according to the Massachusetts Securities Division. Investment advisers do not violate Massachusetts' investment adviser rules per se by using the new social media but must be particularly mindful of the State's advertising, recordkeeping and supervisory requirements because of the risk for harming a large number of investors by virtue of the media's ability to reach an immensely wide audience.

An adviser's web page on facebook, twitter or LinkedIn, for example, would likely be "advertising" if it can be accessed by the general public. Moreover, a web page is "advertising" in Massachusetts if the page is created or maintained in the adviser's name, or contains business-related content about the firm, or solicits advisory services. Even a sole-proprietor adviser's web page is "advertising" if the adviser discusses services in the name of the adviser's representative. And the long-standing restrictions against using testimonials or making misleading statements apply to an adviser's web pages on social media. Similarly, the prohibition against advertising an adviser's past specific profitable recommendations applies to posting those recommendations on a web page unless the adviser posts a list of all the adviser's recommendations made within the last one-year period. Now, new restrictions on the use of social media hold advisers responsible for web page content even if the advisers did not create the content, if the advisers were somehow "entangled" or involved in its creation or preparation by another person, or if the advisers explicitly or implicitly "adopted" or approved or endorsed the content after it's creation by another person.

As for recordkeeping, SEC Rule 204-2 requires advisers to retain their advertisements, and Massachusetts, in addition, requires advisers to maintain a correspondence file or log. Regarding supervision, the long-standing requirement that advisers create and enforce written procedures for supervising their investment adviser representatives applies to supervising their representatives' use of social media and, moreover, instructs state investment advisers to consider recently released SEC guidelines for federally-registered investment advisers on the proper use of social media by their representatives.