• SEC Clarifies Stance on Social Media, Takes Action to Punish Social Network-Based Fraud

    The SEC made news this week with two moves on the social media front. First, it issued three alerts aimed at helping investors and financial services firms understand the risks associated with social media use. Second, it brought charges against a financial advisor in Illinois whom the SEC alleges committed fraud through postings on LinkedIn.

    There are two lessons to take away from this:

    1. The SEC has made social media a priority. After yesterday’s news, it’s clearer than ever that 100% of firms should prepare for social media audits by having strong social media policies and social media archiving in place.
    2. There’s no need to be scared of social media. Fraud is still fraud. While the social networks do present many new challenges for advisors and compliance officers, when it comes to shady activities, only the mediums—not the underlying rules—have changed.

    The SEC’s Stance on Social Media

    A year ago, the SEC fired a shot across the bow when it issued its sweeps letter about social media. (Our CEO, Chad Bockius, analyzed the SEC letter in two blog posts, which you can find here and here.) If that weren’t enough of a call to action for firms and RIAs to take social media compliance seriously, yesterday’s action should be. Social media use is widespread, and the SEC has articulated firms’ responsibility to monitor and archive these communication channels.

    The SEC’s main communication this week, “Investment Adviser Use of Social Media,” is sober and methodical. Probably none of it will be news to compliance departments that have been actively working with their firms’ advisors or agents to promote the compliant use of social media to build professional networks and increase business. But the SEC guidance is useful for the step-by-step reminders it gives about creating and enforcing consistent and meaningful social media policies that balance risk prevention with the need to do business at a reasonable pace.

    Firms have a responsibility not only to implement such policies, but to carry out active monitoring of advisors. Those that don’t could be fined, even in they have a formal policy of prohibition for social network use, because it is unreasonable to believe that policy alone will protect consumers. In our 2011 year-end webinar, Bockius discussed the need for all firms to prepare for social media audits. This week’s SEC action demonstrates how serious that need is.

    Be Vigilant, But Don’t Be Afraid of “LinkedIn Fraud”

    The SEC’s pursuit of the Illinois advisor doesn’t mean that firms should fear the use of social media—much less avoid it altogether. Some of this week’s media coverage might mislead social media holdouts into taking this view.

    Consider the headline of this (otherwise very good) article from AdvisorOne:

    SEC Charges Advisor With LinkedIn Fraud, Issues Social Media Alerts

    I was trained as a newspaper journalist, so I know what headline writers are up against: they have to compress the whole story into just a few words. Unfortunately, headlines like this one make it sound like “LinkedIn fraud” is some new category of crime. In fact, the misdeeds being investigated by the SEC represent very old types of financial fraud, but simply carried out over a social network rather than in person, via mail, via e-mail, or over the phone.

    The article rightly points this out in its eighth paragraph:

    “Fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes,” said Robert B. Kaplan, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “Social media is no exception, and today’s enforcement action reflects our determination to pursue fraudulent activity on new and evolving platforms.”

    Advisors and firms shouldn’t be scared of LinkedIn (or Facebook or Twitter or blogs). Instead, they need to avoid engaging in illegal, unethical, or otherwise prohibited advertising practices . . . just as for every other medium they use.

    Regardless of how the story is covered, it’s good to see that the SEC is following through with its commitment to focus on social media. Your firm needs to be ready if the SEC spotlight should fall your way. Is it?

    Category: Compliance, FINRA/SEC | Tags: , .


2 comments on “SEC Clarifies Stance on Social Media, Takes Action to Punish Social Network-Based Fraud

  1. Timothy E. Walker says:

    Excellent coverage and advice! It’s too bad that a few “bad eggs” make life hard for the rest of us, but that’s the old story of life, not a new story written by social media.

  2. Pingback: More On Compliance & Governance And Their Impact On Social Media In Manufacturing | AJ Sweatt Logic & Communications – Marketing Communications for Manufacturing & Industry

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