Massachusetts Securities Division Comments on Social Media Use by Investment Advisers

The Massachusetts Securities Division (the "Division") recently released an analysis of the findings of a survey sent to all 576 Massachusetts-registered investment advisers regarding their use of social media. The survey is similar to the recently released Securities and Exchange Commission Alert on this subject, Investment Adviser Use of Social Media.[1] The survey revealed Massachusetts investment advisers are increasingly utilizing social media as a way to connect with existing and prospective clients. Not surprisingly, such increased use is now bringing increased scrutiny. As the Division noted, "the potential harm from regulatory violations present on social media websites is magnified because of the potential for a much wider audience." Notably, the Division provided examples of instances in which an adviser may be responsible for information the adviser did not author, such as LinkedIn "recommendations," that may constitute a prohibited testimonial pursuant to Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (the "Advisers Act").

The survey indicated 44 percent of Massachusetts-registered investment advisers use at least one form of social media such as Facebook, LinkedIn or Twitter. Although the Division in its analysis noted that use of social media does not violate Massachusetts investment adviser rules or regulations per se, communications via social media pose new issues to consider from a regulatory and compliance perspective.

Record Keeping

Massachusetts-registered investment advisers should particularly note the Division's position that "as a general rule, web pages maintained by an adviser on a social media website like Facebook or LinkedIn will be considered advertising if the page is created or maintained in the name of the adviser or contains business-related content of the firm or solicitations for advisory services." Advisers Act Rule 204-2 requires investment advisers to retain advertising. Additionally, Massachusetts requires investment advisers to maintain a correspondence file or log with respect to advertising. Because social media websites are not static, the record-keeping requirements pose significant technological challenges for investment advisers.

Entanglement and Adoption

Complicating the compliance issues for Massachusetts investment advisers using social media is the fact that websites such as Facebook, LinkedIn and Twitter allow persons not associated with the investment adviser to post content on an adviser's social media Web page. The Division stated, "An adviser may also be responsible for the content it did not author if the adviser has some responsibility for its creation (entanglement) or has somehow endorsed it (adoption) after the content was created." "Entanglement" generally means the adviser has in some way been involved in the content's creation or preparation. For example, an adviser will likely be considered to be entangled with recommendations the adviser solicits and receives on LinkedIn. "Adoption" generally means the adviser has in some way explicitly or implicitly (through its actions) approved or endorsed the content after it was created. An adviser that selectively deletes third-party material unfavorable to the adviser but continues to display favorable content may be deemed to have adopted the remaining content.

Advertising

Regulations adopted by the Division governing investment advisers require that, in addition to complying with Advisers Act Rule 206(4)-1 regarding advertising, advisers must ensure any advertising is true, does not misrepresent the qualifications of the employee or the nature of advisory services being offered, and is not misleading. Testimonials -- statements by clients or former clients that endorse the adviser or otherwise present a favorable experience of the adviser -- are a prohibited form of advertising. The use of social media presents a readily accessible medium through which clients and former clients may provide such statements regarding investment advisers. In particular, the Division examined whether the use of Facebook's "Like" button and LinkedIn's "recommendations" by clients and former clients constitute prohibited testimonials. The Division's position is that "a client's 'Like' of an adviser's Facebook page -- without more -- does not constitute a testimonial. In contrast ... there is a presumption that a client recommendation posted on an adviser's LinkedIn page is a prohibited testimonial." Other circumstances may change this analysis.

Compliance Enhancement Recommendations

The Division provided four recommendations to enhance investment advisers' compliance of their social media Web pages with respect to third-party content:

• Advisers should review their social media presence on a periodic basis and ensure any content that would be considered noncompliant is removed or hidden from view promptly. A review done daily would be considered reasonable supervision of an adviser's social media site.
• Advisers can avoid many of the potential "entanglement" and "adoption" issues by not soliciting third-party content on their websites or linking to third-party content they have not thoroughly reviewed.
• Advisers should consider incorporating disclosures on their social media Web pages. For example, on Facebook, an adviser could display the following: "'Likes' should not be considered a positive reflection of the investment advisory services offered by [Investment Adviser]. Visitors to this page must avoid posting positive reviews of their experiences with the adviser or its services as such testimonials are prohibited under state and federal securities laws and may not reflect the experience of all clients of [Investment Adviser]."
• In cases where an adviser can proactively block or disable content designed for a purpose at odds with the adviser's regulatory requirements, the adviser should consider proactively blocking the content.

Conclusion
The Division noted that while roughly half of all Massachusetts investment advisers use at least one form of social media, more advisers indicated they intend to use social media within the next year. Facebook, LinkedIn, Twitter and other social media websites quickly are becoming commonplace tools employed by investment advisers to connect with past, present and prospective clients. The release of the Division's analysis signals the heightened scrutiny regulators are applying to the use of social media. Massachusetts-registered investment advisers should re-evaluate their compliance practices in light of the Division's comments.