Increase in data collection– As new laws open up the doors to product marketing online and as investors adopt social interactions for decision-making, we can expect a greater opportunity to capture data. This could be data at the government level or even firm level – data that can be used to detect the next Bernie Madoff or ensure that investors are matched up with suitable products.
▪ More regulatory direction– Reed Hastings, the CEO of Netflix, drew the SEC's attention in 2012 when he put up a Facebook post that referenced a big increase in the firm's streaming hours – an announcement that was promptly followed by a sharp jump in the stock's price. In the end, the SEC opted not to file charges against Hastings; instead, it said that disclosures on social media were appropriate as long as investors were alerted in advance to which channels on which they could expect to receive such information. We continue to see more timely comments from nearly all key agencies, and we also see their presence at industry events, providing more proactive guidance perhaps than ever before. The SEC also made it plain that CEOs are always speaking for the firm when they speak about the firm. Hastings' tweets were attributable to his firm.
The financial industry has often felt hogtied and handcuffed by compliance issues in the past. The arrival of social media on the landscape – a game-changing dynamic that both regulators and financial professionals are still getting their arms around – in many ways has exacerbated the tension wealth managers feel as they plan for business in the twenty-first century. And yet the history of the industry shows that it can, and does, adapt. The tools exist for the advisor who wants to move forward.
Chapter 3
What Are the Tensions Between Social Media and Regulation?
When considering the use of social media in the financial advisory space, it's hard not to think about what an odd couple they make. Social platforms allow people to share any thought that comes into their heads with an audience that numbers typically in the hundreds or thousands of people. By comparison, the financial industry is heavily regulated, particularly where communication is concerned. Advisors and their firms are held to account for the way they present themselves on social media, since investors on the Web can be as easily misled as those of 30 or 40 years ago who read bogus investment pitches in newspaper or magazine ads.
Indeed, nearly 75 percent of financial advisors report working for a firm with a written social media policy, and 82 percent of these advisors say the policy restricts social media use or bars it outright. Advisors who want to use social media more actively in their businesses could be excused if they felt a chill in the room.
And yet, consider the odd couple metaphor a little more. At the end of the day, two people with intrinsically different world philosophies and lifestyles still manage to live together. Likewise, financial advisors and regulatory constraints can co-exist in the social media universe.
Are you an advisor who worries about getting flagged in an audit for stepping outside the bounds? Take a page from the advice you offer clients who struggle with reaching their financial goals: Have a plan.
Regulators like firms that lay out their plans for using social media compliantly; indeed, regulators insist on it. Attorney Stuart Fross, former senior vice president of compliance and general counsel at Fidelity International who now works with firms globally, puts it this way: “Having a system to manage social media is a defense.”
So, do regulators make social media difficult for financial professionals to use? Many advisors certainly believe so, even if it's their own compliance officers who are raising the bar through restrictive in-house rules. Charles Schwab's vice president of compliance communications Melissa Callison said in an interview for this book that regulators have “tried to make expectations clear, but it's extremely complex because you're dealing with third-party sites, and they aren't always cooperating.”
Consider some of the issues that make it hard for the industry to view regulators as friendly to social media in general, and to the way financial professionals use it in particular:
▪ Old Rules for New Media– Many of the existing rules go back to the 1930s and 1940s, an age where social media was a fit subject for science fiction. The SEC's latest pronouncements for advisors on testimonials and social media were more enlightened than many expected.5 But many industry pros feel they have to manage a modern approach to communication with many old rules.
▪ Regulatory Reputation– Some industry leaders believe regulators are concerned about how they look in the new social media world order as they work their way through investor protection. As a result, “They're unwilling to give anyone a sort of pass for anything that happens on social media,” says Theresa Hamacher, CEO of NICSA, a sponsor of online forums for the global investment management community.
▪ Layer upon Layer– Adding to the complexity of rules and guidelines that have existed for decades are new rules and oversight activities, such as spot-checks of advisor activity on social websites. Some advisors feel it only compounds the difficulty of having simple-to-use systems in place.
Faced with the challenges of serving client interests in the wake of the 2008 financial crisis, advisors often see compliance as one more obstacle to overcome.
Absent an entire rewrite of arcane rules, managers in the financial industry have told me there are a few things regulators like FINRA could do to simplify investor protections.
For example, some have suggested moving to a more principles-based approach for rulemaking. Callison points out that the SEC employs this philosophy, which essentially lays out a rule and then leaves it up to the firms to outline the best course of supervision.
In comparison, FINRA's prescriptive approach to rulemaking lays out specific rules for firms to follow. It requires firms to know – and implement – a great deal: static versus interactive content on the Web; pre-approval versus post-approval of content; content standards such as fair and balanced, and no false or exaggerated content; no predictions…the list goes on.
And while users of social media are on their sites to absorb quick, digestible pieces of information, the necessity of disclosures surrounding most financial conversations makes having a social venue for those discussions a real problem.
So a regimen that sets goals and allows some flexibility for reaching them offers advisors some options for serving clients responsibly while staying within regulatory boundaries
The temptation among many advisors is to just stay on the sidelines while the regulatory issues surrounding social media work themselves out. You may well say to yourself, “Why not let others mess up their reputations? We'll get started later, when we're ready and the system has ironed out the kinks.”
The obvious problem with that approach is that it means sitting out a dynamic market and ceding leadership to others. It may sound obvious, but in order to learn how to manage social media, you have to use social media. But the bigger problem with staying on the side in this industry is that it's unnecessary. A firm has a defense when something goes awry as long as it has policies and procedures in place to address what regulators expect.
Hamacher likens it to a sexual harassment policy: If a company has established rules explicitly restricting inappropriate behaviors, it provides the firm with greater protection, except in the most egregious instances.
The problem, she points out, is that “there isn't that clear statement in the social media world.” That's precisely why the industry remains so confused.
Who's to blame for this interpretational mess? Hamacher suggests the industry should look toward itself rather than at Washington rule-makers. The industry, she says, doesn't want to get caught with its social media pants down.
Remember, regulators' concerns are about preventing certain behaviors. But too many firms are saying: We don't want to do this