Financial Times

Social Media Is a Thorny Issue in the U.S.

Twitter and Facebook may have become the preferred channel of communication for many individuals and businesses around the world. But within the investment management industry, social media is still an emerging technology.

Ill-fitting regulations are a primary reason for industry’s hesitancy about the new media. We believe that these regulations need to be changed to make it easier for both investors and those working in the industry to keep up with the latest information.

To date, regulators on both sides of the Atlantic have opted to apply existing rules governing advertising and promotion to an investment manager’s use of social media.

These rules generally require that communications with the public paint an accurate picture for potential investors. For the Financial Services Authority in the UK, the catchphrase is “fair, clear and not misleading.”

The broad requirements may be supplemented by more specific guidelines governing the content of advertisements. In the United States, the Securities and Exchange Commission bans the use of testimonials, which the SEC staff has interpreted to be “statement[s] of a client’s experience with, or endorsement of, an investment adviser”.

While the SEC’s testimonial rule may seem simple and logical, many of the most basic social media features can fall afoul of it. For instance, clicking the Like button on a fund manager’s Facebook page can be a deemed a testimonial, as can a comment on a blog post.

As a result, U.S. investment managers can’t be very social in their social media sites. They often do not accept any user-generated content, such as comments on posts. And if they do, they will monitor submissions closely and quickly take down any that could raise eyebrows at the SEC.

And star rating systems, like the one on Amazon? Forget about it! Recent attempts to create systems for providing client feedback on financial advisers have been stalled by regulatory concerns.

In short, it’s hard for investment managers in the United States to use their own social media sites to collect customer feedback. And investors end up the losers, since they can’t tap into the collective experience for guidance.

At the same time, the advertising rules – which apply to everyone who works at a business – have had a chilling effect on the business use of social media by the employees of U.S. investment managers.

Take that pesky Like button again. From a U.S. regulatory perspective, whenever an employee of an investment manager Likes a site, he or she is effectively endorsing it.

It should be no surprise then, that – rather than risk endorsing questionable sites – many fund management companies completely ban the business use of social media by most of their employees.

These bans have had the unfortunate side effect of creating an information blackout for investment industry employees. If employees can’t Like pages, they can’t subscribe to the news stream from those pages, making it much more difficult for them to monitor the industry developments that keep them up to date and better prepared to serve investors.

In our view, the SEC needs to refine its interpretation of the advertising rules to better accommodate social media.

First, the SEC should presume that, barring evidence to the contrary, user-generated content does not constitute a testimonial or endorsement.

Yes, it’s possible for a fraudster to manipulate Likes or comments, and the SEC should continue to be able to pursue enforcement actions when there are indications of malicious intent or collusion with fund promoters.

In the preponderance of cases, however, input from users is not intended to deceive and may even serve to reveal shady practices. This feedback can give potential investors valuable perspectives on the information and services provided by the fund manager.

Second, the SEC should recognise that fund management companies cannot control social media posts as easily as they could control traditional advertising and encourage them to establish internal enforcement programs. An effective program – including employee training – would provide a fund management company with some protection from liability, especially in the case of minor violations.

Regulators across the European Union should develop a uniform approach to fund advertising – perhaps as part of the Ucits regime – to promote the appropriate use of social media by the fund industry. Both investors and industry employees would benefit from a freer flow of information about funds in the social media.