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Implementing a social strategy that won’t get you fined by the SEC

Implementing a social strategy that won’t get you fined by the SEC
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The Securities and Exchange Commission’s new marketing rules provide investment advisors with new and exciting opportunities for online marketing. But the new rules are full of dangers.

As we approach the agency’s November 4, 2022 compliance deadline for the updated Investment Advisors Act, it’s important for businesses to understand exactly what they can and cannot do, particularly when it comes to marketing and advertising via social media and messaging apps, as well as the agency’s new mandate. on digital record keeping. Otherwise, they could face significant financial penalties.

The Securities and Exchange Commission (SEC) raised a record $4.7 billion in fines in 2020, and enforcement cases by the financial industry regulator have increased across the board. International data privacy and data residency requirements are also becoming more complex, with new guidelines being implemented in many parts of the world.

Here’s what you need to know:

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Obviously, one of the biggest changes to the Investment Advisors Act is the new marketing rule, Rule 206(4)-1, which allows regulated firms to include testimonials, endorsements, and third-party ratings in their advertising and marketing communications. For the first time, this now includes online marketing, such as social media, websites, email, and mobile apps.

But to do so, investment firms must follow the agency’s strict guidelines by providing appropriate disclosures, presenting information in a fair and balanced manner, and avoiding misleading language.

These standards are easy to follow in traditional marketing communications, such as print, radio and television advertising. They become more complex as companies begin to delve into the mysterious and dynamic world of social media and messaging applications.

The dynamic nature of social selling raises questions

Contrary to the static nature of traditional advertising, social media and mobile app marketing is highly fluid and interactive, regularly blurring the lines between professional and personal, targeted and undirected.

These characteristics can easily lead to fatal mistakes by investment firms that violate SEC regulations.

Here are some examples:

When do ‘likes’ and tweets exceed the limit? Advisors can run into problems when they appear to endorse third-party content discussing their investment advisory services.

The new marketing rule doesn’t specifically mention social media retweets and “likes” in this context, but the SEC has penalized retweets before, as in this reference to an advisor who was penalized for retweeting banned client testimonials (Before the enactment of a new marketing rule law).

In the SEC’s final rule, its language explains the implications: “The advisor adopts third-party information when it endorses or expressly or implicitly approves of the information…the advisor is responsible for third-party content under the marketing rule just as it would be responsible for the content it produces.” By himself “.

Therefore, advisors should avoid retweeting or endorsing via third-party content “likes” in social media that mention the firm’s investment advisory services, unless they include appropriate disclosures and ensure that the information is not misleading or false.

Do retweets count as testimonials? Yes they can. If your company re-shares a positive post on social media from a satisfied customer, that’s actually a testimonial, even if the post is spam. This means that you must follow the same required disclosures as other certifications.

When are direct messages regulated? Like other types of one-to-one communications, direct messaging in social media or messaging apps generally does not require disclosures by the advisor, unless the advisor includes “hypothetical performance information.”

In such cases, the advisor is excluded from required disclosures only if hypothetical performance information is sent in response to an unsolicited request by an investor for such information or to an investor in a private fund.

Can you use social media influencers? Yes, but social media influencers are considered promoters and therefore they must provide the required disclosures as mentioned under the marketing rule.

To avoid conflict with this regulation, advisors are encouraged to “provide this blogger or influencer with the required disclosures and ensure that they are presented appropriately on his/her pages.” It is also recommended that Advisors include this disclosure clause in any written agreement or contract with the Influencer.

How about a live broadcast or online broadcast? The SEC’s updated marketing rule excludes “immediate and direct verbal communication, regardless of whether it is broadcast” from its advertising regulations. This means investment advisors can broadcast live on Facebook, YouTube and other platforms, or host or participate in live broadcasts across the web, without having to worry about meeting ad compliance standards.

However, the SEC’s language here is very specific – if the online broadcast is prerecorded rather than live, or uses pre-made notes or written language (such as presentation slides), it will not be excluded from these regulations. The same shall apply if a recorded copy of the webcast is distributed thereafter, “if the recording provides the advisor with investment advisory services in connection with securities.”

It’s easy to see how quickly this gets complicated. While the SEC’s rules and guidance don’t always mention specific examples of social media interactions, that doesn’t mean their standards don’t apply. Investment firms will need to make sure they stay on track and narrow to avoid potential abuses.

Social media should be archived

Equally important in the SEC’s changes to the Investment Advisors Act is the updated record-keeping rule (Rule 204-2), which now applies to all advertisements, including those distributed digitally.

Under the updated rule, investment advisors must “create and maintain records of all ads they post,” which under the new marketing rule means ads sent “to more than one person, or to one or more people if the communication includes hypothetical performance information, which provides Investment advisory services for the investment advisor. These records must be kept “in an accessible location for a period of at least five years,” although the SEC “does not prescribe or prohibit” any particular way to store these records.

So what does all this mean in a practical action awareness scenario?

Essentially, if any of the company’s consultants are using LinkedIn, Twitter, WhatsApp, or any number of social media apps to market their services to potential new clients, they need to keep a digital archive of all those communications. Remember that these messages and posts are now considered a form of advertising.

Given the requirement to maintain this type of outreach in an “accessible location” for at least five years within a suitable office to operate, this means that regulated firms essentially need to maintain a central digital archive of all social selling communications of all advisors, which are seamlessly searchable on legal readiness.

As the penalty phase for the SEC’s new marketing and bookkeeping rules quickly approaches, advisors need to start making plans now to have them hired by late this year to achieve compliance with these new SEC regulations, and be prepared to capitalize on all of their employees’ social media communications that promote their financial services to potential clients. If they do not, they may find themselves subject to unavoidable heavy regulatory fines.

Jim Zuffoletti is CEO and co-founder of SafeGuard Cyber, which provides digital communications compliance, security and privacy technology to financial services companies.

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