It may seem completely crazy to compare the use of social media with sexual harassment.

To its many advocates, interacting through social media is the wave of the future and a positive force. A force that is leading to more communication and a freer flow of information. Sexual harassment, on the other hand, is universally condemned as an evil rooted in the attitudes of the past.

From a fund industry employer's perspective, however, social media and sexual harassment can be remarkably similar. They both enable virtually every employee to create liability for the firm-through speech that is impossible to prescreen and difficult to monitor after the fact.

Think about it. Any supervisor can make an unwelcome advance toward a subordinate that leads to a sexual harassment lawsuit. Any staff person can make an off-color joke that contributes to a hostile environment. Now, any employee with a Facebook account can broadcast false claims or inaccurate statements about a company's products and services. Or the performance of a fund. This can lead to allegations of fraud, from investors.

What can employers do? They can't stop their associates from talking to each other, nor can they forbid them from using social media on their home computers in their personal time.

A Road Map to Limiting Liability

Fortunately, employers do a have a road map for avoiding liability, drawn from rulings on sexual harassment by the Supreme Court as far back as 1998 (Faragher v. City of Boca Raton and Burlington Industries v. Ellerth). They can significantly reduce their exposure, if they:

* Ensure that the workplace doesn't become a hostile environment, one that discourages reporting of harassment

* Reasonably supervise managers

* Act promptly when they receive reports of harassment

To that end, most employers have established policies that make it clear that harassment will be not be tolerated-along with training on what constitutes appropriate behavior in the workplace. They've created procedures for filing complaints about harassment-and encouraged employees to use them. Then they respond quickly and decisively to any complaints that are filed-sanctioning the offending employee if warranted.

To be sure, employers can't completely eliminate liability through policies and procedures. They're still at risk if the firm's most senior executives are the offenders or if the harassment results in a tangible employment action, such as a firing or pay cut. But those policies and procedures can help firms steer clear of those reefs - by promoting early reporting before problems become severe.

Social Media's Route to Reducing Risk

When it comes to social media, however, there's no clear route to reducing risk. Until the courts or regulators say otherwise, an unauthorized tweet by a single employee carries the same risk to the firm as a brochure printed and distributed by the marketing.

Many firms are trying to reduce the resulting risk in the traditional way-by restricting production of any social media posts to authorized personnel. Other employees are not allowed to engage in any business-related social media-even on their personal time and through their personal accounts.

These types of restrictions have been particularly stringent in the investment industry, which is not surprising given the detailed rules governing advertising in the field. Those rules can turn even the most basic social media functions-such as clicking on Facebook's Like button-into a regulatory minefield.

But blanket prohibitions won't work in the long term. From a practical perspective, the National Labor Relations Board has made it quite clear that employees have the right to talk about working conditions with their co-workers in all forums-including social media channels.

Thinking more philosophically, social media restrictions will ultimately prove self-defeating, because they limit the information flow-a particularly deadly thing in an information industry such as the fund business. Neither fund firms nor their investors will be well-served by the resulting tunnel vision.

Toward More Openness

It's not too late for the investment industry to adopt a different approach to social media management: One based on policies, procedures and training.

Some firms are already moving in that direction. For example, Morgan Stanley has just announced a trial program that will allow financial advisors to write their own spontaneous tweets.

Regulators need to support the move to self-management of the risks of communicating through social media. For a model of success, they need only look at the harassment prevention programs that firms have established. Because of those programs, the workplace of today is remarkably different from the one of 30 years ago-where women had to learn to love a dirty joke if they wanted to succeed.

Imagine a similar success for social media at investment firms: An environment where information flows freely-and where all staff members understand the rules regarding communications and help the firm remain compliant. That's a world that works for both the industry and investors.

Theresa Hamacher is president of NICSA, the National Investment Company Service Association.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.