Will the recent SEC risk alert chill the use of social media by asset management firms? Or simply put it on ice?

While leading asset managers like Fidelity Investments are "still evaluating" an SEC alert warning investment advisers to be wary about using the Internet's social media sites, at least one industry expert believes the Jan. 4 edict "will chill the use of social media by asset management firms."

In fact, attorney Todd Cipperman of Cipperman Compliance Services in Wayne, Pa., finds the National Examination Risk Alert issued by the SEC's Office of Compliance Inspection and Examinations (OCIE) "such a broad interpretation, that I read [it] as saying that you shouldn't use social media. If at a certain point, you can't do this and you can't do that-if you can't talk about the services you offer-why would you go on social media at all?"

The SEC alert came on the heels of fraud allegations against an Illinois financial adviser charged with using LinkedIn to attract prospective investors by providing false and misleading information about what turned out to be fictitious products. The more than $500 billion offering on LinkedIn and other social media sites was part of an alleged scam by Lyon, Ill., adviser Anthony Fields that also involved false SEC filings regarding assets under management and operations of two sole proprietorships.


"The medium is almost a side note, given that this type of scam can be perpetrated on- or offline," said Kasina Senior Research Analyst Julia Binder. In fact, Binder believes that "if anything, the SEC alert should spur anyone still on the sidelines regarding implementing social media strategies to get in motion to identify the platforms that make the most sense to interact with [the three-quarters of] advisers who are using social media."

At the Investment Company Institute's May, 2011 meeting, a panel on "Using Social Media in Fund Communications" concluded that asset management firms must have a social media presence if they want to remain relevant to financial advisers and investors.

"We operate in a highly regulated industry," Binder added, "but there are many ways for social media to build loyalty and advocacy. I'm not advising anyone to throw caution to the wind; it's about developing strategy with compliance, sales and legal."

Binder's comments elaborated on results of the consulting firm's first Social Media Index, released last May, which congratulated 45 asset management companies. Based on their presence and effectiveness on Facebook, Twitter, blogs, LinkedIn and YouTube, Fidelity and Vanguard were rated "best in class," followed by TIA-CREF, iShares and The Hartford as "above average." A new study will be released this year.

"These firms are not just pushing content out at recipients. They are all doing two-way communications," a Kasina spokesperson told MME at the time. "Secondly, they are focused on high-quality content not just throwing anything out there to be in the social media space."


But one key takeaway from the SEC's latest Risk Alert is contributing to new confusion surrounding the use of social media: It states that "Particular attention should be paid to third-party content (if permitted)."

It goes on to say that "Firms that allow for third-party postings may consider having policies and procedures concerning third-party postings, including the posting of testimonials about the firm or its IARs as well as reasonable safeguards in place to avoid any violation of the federal securities laws."

While it concedes that the term "testimonial" is not defined in the applicable statute, the passage also notes that "SEC staff consistently interprets that term to include a statement of a client's experience with, or endorsement of, an investment adviser."

Says Cipperman: "To say that if someone goes on Facebook to say they 'like' [a firm's] service is a testimonial is like saying, 'Don't use it!'"

Kasina's Binder disagrees. "Third-party comments are part of the fabric between advisers and wholesaler," she notes. "It happens at conferences and meetings, so there are plenty of ways to train for and manage these circumstances. The same rules and regulations apply."

She added, "The SEC alert should serve as a rallying cry to implement effective technologies that allow firms to reach customers and prospects while managing risk and keeping firms protected."


While pre-existing social media guidelines may have focused on compliance, the third-party alert is a fresh reminder to mutual fund firms to recognize the importance of monitoring. Notes Binder's colleague Saadiah Freeman, Kasina senior managing consultant, "As on any professional social media site, comments should be moderated. To partner closely with compliance there must be a process for reviewing third-party content."

The SEC alert proposed a number of ways social media content could be reviewed. But it has also been criticized for lack of specific usage guidelines.

Cipperman compares the agency's stance to its original position on e-mail. "Once again, they are absolutely painting with a broad brush," he noted. "Asset management firms will have to take what they can from it and build procedures accordingly."

He is telling clients to reconsider their position by asking themselves how valuable social media is to their marketing plan. "Remember when the Web first became popular, the SEC was all over it. Eventually, I think they'll get around to dealing with it better. They usually do."


Read the January 4 alert



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