In what may be a sign of a tightening of regulation of social media use by investment advisors, the Securities Division of the Massachusetts Secretary of State’s Office is issuing new guidelines and best practices standards that will go into effect next year.
Steven Selby, director of regulatory services at LIMRA, a Connecticut-based insurance and financial industry research organization, said, “Now, with more financial advisors using social media to communicate with their customers, we are seeing state regulators take a closer look at how and what they are communicating. We expect a number of states to follow Massachusetts’ lead.”
The Secretary of State’s Office in Massachusetts acted after conducting a survey which found that of the 44% of investment advisors in that state who currently use social media platforms to communicate with their clients, only 30% have written record-retention policies for social media content, and only four in 10 retain all online content posted by the firm.
FINRA has regulation 10-06 which provides guidelines for the use of social media in marketing activities by advisors and their broker-dealers, but some state regulators are concerned that this may not be adequate, given the increasing popularity of social media among advisors.
One big concern, and a motivation for the move by the Massachusetts Secretary of State, is that effective Thursday, many smaller financial advisory firms currently regulated by FINRA will shift over to the responsibility of state financial regulators.
Prior to July 28, FINRA was responsible for all such firms with more than $25 million in assets under management. But under the terms of the Dodd-Frank Financial Reform Act, that will change to be only firms with more than $100 million in assets under management, with all smaller firms becoming the responsibility of state regulators.
As an example of the kinds of problems that can develop with social media use by financial advisors, LIMRA’s Selby notes that FINRA recently fined an advisor for using Twitter to send “unbalanced” messages to clients, offering a “very optimistic” view of the economy and equities markets without disclosing the potential hazards.
"Despite the guidance from FINRA, there is still much confusion on what can and cannot be said using social media," he said. "Companies can help avoid this problem by ensuring advisors selling their products have a clear understanding of its policies and of the rules set forth by the regulators."
If more states follow Massachusetts’ lead, there may be more of those policies and rules to have a clear understanding about.