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News January 23, 2012 Issue

Massachusetts Offers Guidance on Adviser Use of Social Media

Last summer, the Massachusetts Securities Division (MSD) surveyed 576 of its registered advisers regarding social media usage and practices.

The MSD asked advisers if they used social media, if they planned to use social media, which social media networks they used, and the biggie Ė what compliance procedures they had established to secure maintenance of records and to assure supervision and compliance obligations.

What the MSD found shocked them into action.

While close to half of the responding advisers said they used social media in some form and expected that usage to increase, survey responses suggested to the MSD that adviser compliance programs were lagging behind the curve.

Specifically, in its July 6 report, the MSD said "some advisers do not have policies relating to the retention or supervision of social media content, are not retaining social media content, and do not supervise the use of social media content." As a result, the MSD said further guidance would be appropriate to assist Massachusetts-registered advisers in maintaining a compliant advisory practice.

On January 18, the MSD issued that guidance to advisers on the use of social media.

Generally, itís advertising, said the MSD.

Whether a web page is advertising is based on individual facts and circumstances, but the general rule is that web pages maintained on social media sites by a firm or its representatives that discuss the adviserís services will be considered advertising.

Advertising rules related to content and recordkeeping will apply.

Advisers must avoid testimonials, entanglement, and adoption of third party content.

Advisers are responsible for content that they or their representatives author on their webpage, said the MSD, and may be responsible for third-party content they do not author but somehow might participate in creating or endorsing.

For example, links to other content could imply that an adviser approves of or endorses the linked content. Selective removal of negative postings while continuing to display more favorable content may be deemed to be adoption of the favorable postings.

Entanglement and adoption have been discussed by the SEC with respect to company websites, and by FINRA with respect to broker-dealer use of social media sites, observed MSD. "The concept is equally usable in the investment advisory context," it said.

While the SECís recent National Examination Risk Alert on adviser use of social media did not include a discussion of the entanglement or adoption theories, it did suggest that use of features such as the "Like" feature on Facebook ("Recommend" on LinkedIn, for example) could constitute a testimonial.

The MSD agreed with that guidance, but added that, "the Divisionís position is that a clientís ĎLikeí of an adviserís Facebook page Ė without more Ė does not constitute a testimonial." The danger of a testimonial is giving a reader the mistaken impression that the experience of one client will likely occur for the reader as well, said the MSD. Facebook "Likes" by themselves are not likely to create such an impression.

Not so for LinkedIn "Recommends," however. Under the Massachusetts regulatory regime, the presumption there is that a client recommendation posted on an adviserís LinkedIn page is a prohibited testimonial.

The MSD noted that facts and circumstances under either scenario could change the analysis.

The MSDís guidance observes that performance advertising presents particular challenges for social media in presenting "full and fair disclosure of all material information," especially, for example, on Twitter, which may be inappropriate for such use.

The MSD also offered guidance for social media compliance programs, including model disclaimer language for social media sites and observations regarding supervision issues.

Advisers should monitor their social media presence periodically, and remove non-compliant content promptly, observed the guidance. "A review done daily would be considered a reasonable supervision of the adviserís social media site," said the MSD. Less frequent review may be appropriate depending on the siteís traffic, and the type of site, it said.