Social media and investment advisers: LinkedIn "testimonial" caution and other pitfalls.

• Author: Hill, Daniel D.
• Position: Legal Brief

Social media has dramatically changed the way people communicate. It has converted the traditional two-party private exchange into an interactive, multiparty dialogue open and accessible often to a multitude of third parties. It has also changed the static nature of one-way content exchange in mediums like websites to active exchanges where content can be freely created, exchanged and sometimes altered.

The popularity of social media itself is changing equally dramatically. Internet users visit social media sites more than any other internet sites. In just one year--2011 to 2012--the total time spent on social media sites in the United States by PC and mobile device users increased by 37 percent.

Antiquated Rules

The social media revolution has of course not gone unnoticed by businesses. Many businesses today actively and sometimes aggressively utilize such social media mechanisms as blogs, Facebook, Twitter and LinkedIn to extol the virtues of their services and products. As tempting as the broad and new market places offered by social media are, however, certain government-regulated businesses like investment advisors must proceed with caution.

Unfortunately, neither the SEC nor FIN RA has reacted to social media usage as quickly as social media has burgeoned. In January 2010 and August 2011, the SEC issued some guidance to broker-dealers, and in January 2012 it also issued an Alert for Investment Advisers. Although the SEC's Office of Compliance Inspections and Examinations attempted to provide some guidance for investment advisers, that guidance to date has been very limited.

The same is true of those attempting to extrapolate on the SEC's alerts. Most nongovernment publications available so far to those seeking deeper guidance do little more than reiterate the SEC's suggestions and cautions.

About all that is clear now on the use of social media by investment advisers is that while using social media is not prohibited, the use of social media is subject to federal securities laws and applicable FINRA rules, and investment advisers who want to make use of social media should proceed with caution and as much knowledge as possible.

Applying what may be antiquated rules to a new technology is fraught with pitfalls. Nevertheless, the SEC's suitability, privacy and communicating with the public requirements and rules still apply. The record-keeping requirements of the 1934 act, as well as FINRA rules remain in play as well, along with the...