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News January 9, 2012 Issue

SEC Releases Social Media Guidance for Advisers, Makes a Point With Concurrently Released Enforcement Action

Here's a tale about a guy who (allegedly) started out bad and stayed bad.

He registered with the SEC as an adviser with $400 million in assets under management, when in reality, he had no money under management at all.

He claimed he ran a "leading institutional broker-dealer" named Platinum Securities Brokers that was - you guessed it - not leading, not institutional, not even registered, and was also as the SEC politely put it, "unfunded."

Anthony Fields, the lone operator of Platinum and his eponymous advisory firm, Anthony Fields & Associates, might have gotten away with it for longer if he hadn't used social media as part of his scheme to defraud prospective investors.

According to the SEC, Fields made multiple fraudulent offers of fictitious bank guarantees and medium-term notes in discussions on LinkedIn. The SEC said he received multiple responses to his postings from purported potential investors.

Fortunately for those potential investors however, he never sold any of the sham offerings. The SEC said Fields was an adviser in name only, who had fraudulently obtained SEC registration with no assets, no clients, and importantly - no compliance program, no books and records, and no code of ethics.

This guy isn't you.

However, with its January 4 order instituting proceedings against Fields, the SEC sent a clear message that the streets it's policing include the avenues of social media. As technology develops, the SEC is making it known that it is keeping pace.

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

The SEC order lists multiple charges related to the fictitious advisory business, including failure to adopt and maintain a written code of ethics, failure to adopt or implement written books and records, falsifying information on the firm's Form ADV and in its brochure, and misleading the public, clients, and prospective clients with false information on its website.

Only once do the charges refer specifically to social media. The SEC said that Fields failed to maintain adequate books and records in that he did nothing to retain any of his communications made through social media.

The SEC noted that the social media sites he was using to do business, including Netzero, LinkedIn, and Trade Key, delete emails and online communications after six months.

The SEC didníŽt make any other allegations specifically regarding social media. For example, the order didn't say Fields failed to make and keep social media policies and procedures. It only said that he used a fill-in-the-blank template compliance policies and procedures manual that came with a compliance outsourcing subscription, and that he didníŽt bother to implement any part of the "facially deficient" compliance program he used the template to create.

Of importance here is that social media activity is what brought Fields to the SEC's attention. The order is the SEC's first overt action putting advisers on notice that the SEC is actively surveilling adviser activity on social media sites for evidence of fraud and other misconduct.

SEC releases first adviser social media guidance.

In conjunction with its announcement of the order against Fields, the SEC released a National Examination Risk Alert on Adviser Use of Social Media (Alert). The Alert was the first guidance issued by the SEC to advisers on the use of social media.

"As investment advisers increasingly utilize social media to communicate with clients and potential clients, firms need to be mindful of the applicable standards governing those communications," said OCIE director Carlo di Florio.

"The alert reviews concerns that may arise from use of social media by firms and their associated persons, and offers suggestions for complying with the antifraud, compliance, and recordkeeping provisions of the federal securities laws. The alert notes that firms should consider how to implement new compliance programs or revisit their existing programs in the face of rapidly changing technology," said the press release accompanying the Alert.

In the Alert, OCIE said social media converts passive, static communication into active and interactive content and its use is rapidly accelerating.
In this environment, the Alert observes that multiple overlapping policies and procedures for advertisements, client communications, and electronic communications may or may not include social media use and may cause confusion as to which policies or procedures apply to social media use.

The Alert also observes that many procedures lack specificity as to which types of social media activity are permitted and prohibited.
The Alert offers a "non-exhaustive" list of factors that an investment adviser may want to consider when evaluating the effectiveness of its compliance program with respect to firm, IAR or solicitor use of social media, including:

  • Usage guidelines;
  • Content standards and approval of content;
  • Monitoring and appropriate frequency of monitoring;
  • Firm resources;
  • Criteria for approving participation;
  • Training;
  • Certification; and
  • Functionality, that is, keeping up with developments such as new features of a social media website that would affect the risk exposure of the firm and its clients, and may cause a firm to reconsider whether participation in that particular platform remains appropriate.

The Alert also addresses third party content and testimonials, noting that "whether a third-party statement is a testimonial depends upon all of the facts and circumstances relating to the statement."
Importantly, the staff stated in the alert that it believes that, depending on the facts and circumstances, the use of the "like" feature and other social "plug-ins" could be considered to be testimonials under the Advisers Act. The staff also said it believes that explicit or implicit statements of a client's experience with a firm or IAR could be a testimonial, as well as, for example, if the public is invited to "like" an IAR's biography posted on a social media site.
The alert notes that social media activity is subject to Advisers Act recordkeeping requirements. OCIE cautioned that as part of an adviser's analysis of its ability to permit or engage in social media activity, the adviser should consider its ability to capture and retain required records and make them available for inspection by the SEC.

"The SEC staff hopes to strengthen advisers' compliance and risk management programs by sharing observations from its review of advisers' use of social media together with suggestions for compliance practices," said the Investment Adviser Association in an alert of its own on the release.