The advertising rules ensure investors get complete information about a complex product, but some of their specifics don’t mesh well with social forums. Particularly problematic is the ban on testimonials, which the SEC staff has interpreted to be “statement[s] of a client’s experience with, or endorsement of, an investment adviser.”
Unfortunately, using many of the most basic social media features can fall afoul of the testimonial rule. For instance, clicking the Like button on a fund manager’s Facebook page can be deemed a testimonial, as can a comment on a blog post.
Ad rules stifle communication
The advertising rules may seem obscure, but they’re significantly affecting the fund industry’s communication. Investors can see this very clearly in one way: Fund industry social sites aren’t very social. Fund management companies often do not accept any user-generated content, such as comments on posts. And if they do, they’ll closely monitor submissions and quickly take down any that could raise eyebrows at the SEC.
And star rating systems, like the ones on Yelp, eBay or Angie’s List? Forget about it. Recent attempts to create systems that would allow clients to provide feedback on financial advisers have been stalled by regulatory concerns — so these advisers can’t get feedback about the materials they post online, such as economic analysis or retirement-planning templates. Investors end up the losers here, since they can’t tap into the collective experience to find the most helpful tools.
It’s not that the fund management companies are worried about dissatisfied customers posting negative comments — at least when it comes to complying with the advertising rules, that is. They’re more concerned that happy investors will say good things that could be considered testimonials. In short, it’s hard for management companies to use their own social media sites to collect customer feedback. (The best they can do is monitor the Twitterverse for mentions of their firms under other Twitter handles.)
However, the biggest impact the advertising rules are having in the industry may be behind the scenes, where they’ve had a chilling effect on the business use of social media by employees at fund management companies. This is partly the result of the broad scope of the rules — the advertising restrictions apply to everyone who works at the firm. In the old days, when public communications could be released only through a limited number of traditional media channels, enforcing compliance was easier. But, today, when anyone can set up a Facebook account and make public posts to it, the challenge is much greater.
In this context, even the most basic social media functions are troublesome. Take that pesky Like button again. From a regulatory perspective, whenever an employee of a fund management company “likes” a site, he or she is effectively endorsing it and, therefore, is expected to have done reasonable due diligence to ensure that its content is neither fraudulent nor misleading. If, however, an employee quickly clicks the Like button after only a cursory review, and it turns out that the site is promoting a fraudulent investment, the fund management company could end up facing liability.
It should be no surprise then that many fund management companies ban the business use of social media by most employees. In other words, their personal Facebook and Twitter accounts can’t be used for anything work-related. (The exception is LinkedIn. Most fund management companies allow their employees to maintain a bare-bones professional profile there, making it the most heavily used social media channel in the industry.)
These bans are understandable, but they’ve had the unfortunate side effect of creating an information blackout for fund industry employees. If employees cannot “like” pages, they can’t subscribe to the news stream from those pages, making it much more difficult to monitor the industry developments that keep them up to date and better prepared to serve investors. (Facebook is reportedly developing a “Subscribe” button that might be more palatable to regulators, but what about the equivalent “Connect” or “Follow” buttons on other platforms? It would make more sense for regulatory assessments to be based on functionality rather than labeling.)
Employees of fund management companies should have ready access to third-party commentary on the latest regulatory changes, the intersection of technology and privacy, and the latest trends in asset management — and not be forced to rely solely on information provided by their employers. All of these topics — and many others relevant to the fund industry — are extensively covered by blogs and other social media posts.
A more nuanced regulatory regime
It’s time the SEC refined 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 most cases, input from users is not intended to deceive and may even serve to reveal shady practices. The feedback can also give potential investors valuable perspectives on the information and services provided by the fund manager. Moreover, the unedited nature and volume of the user comments helps to ensure that they are indicative of the average investor experience, unlike testimonials carefully selected by the fund management companies.
Securities regulators in Massachusetts have already moved in this direction. They have taken the position that, in and of itself, a client’s “like” of an adviser’s Facebook page does not constitute a testimonial. However, they don’t allow investment advisers to actively solicit “likes” for their pages, and they continue to prohibit other forms of investor recommendations.
This isn’t to say that fund sites must become a free-for-all. Fund management companies could still set guidelines for user-generated content, perhaps by prohibiting recommendations for specific securities as they do today. And their enforcement of these guidelines would have to be even-handed and not create a misleading picture. For instance, they couldn’t just delete negative comments about their firm while letting glowing reviews stand.
Second, the SEC should recognize that fund management companies cannot control social media posts as easily as they can control traditional advertising, and it should encourage companies to establish internal enforcement programs. Firms would create guidelines for their employees, establish systems for monitoring adherence to them and impose penalties for violations that would vary in severity depending on the nature of the offense. Having an effective program — which would include extensive training — would provide a fund management company with some protection from liability, especially in the case of minor violations.
For a model for these programs, the SEC need only look to the ethics programs that firms have in place today. Through periodic education and immediate responses to problems, companies hope to discourage bad acts by employees and limit potential risk should they still occur.
A similar approach to social media could have broadly beneficial effects. Instead of choking off the flow of news, an effective communications policy would encourage responsible use of social media channels, making it easier for investors and fund industry employees to stay informed.
Pozen (@Pozen) is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution. Hamacher (@NICSAPres) is president of Nicsa. Together they are co-authors of “The Fund Industry: How Your Money is Managed” (Wiley, 2011).