A big shout out and thanks to Scott Gottlieb for his guest post today on AdvisorBlogger.  Please feel free to post any questions or comments regarding his post today.  

Scott Gottlieb is President of U.S. Compliance Consultants, LLC, a full-service consulting firm that specializes in compliance and registration services for investment advisers and hedge funds.

Prior to founding U.S. Compliance Consultants, Scott practiced corporate and securities law in the New York and Los Angeles offices of Kelley, Drye & Warren LLP, an international law firm, as well as with various regional law firms. During the course of his legal career he has advised clients on federal securities regulation, investment adviser compliance, broker-dealer regulatory issues, venture capital financings and international joint ventures.

Scott is a frequent contributor to the Schwab Institutional Compliance Review newsletter and has been designated a compliance expert for AdvicePointä, the online investment adviser community sponsored by Reuters, the global information company. Scott is an honors graduate of Tufts University and the University of Connecticut School of Law.  Prior to law school, Scott maintained his Series 7 license as a Financial Consultant with Merrill Lynch & Co., Inc.

U.S. Compliance Consultants provides compliance consulting to clients advising on assets in excess of $160 billion and yet, its philosophy remains that the adviser with $10 million under management should be afforded the same high level of service and expertise as the adviser managing $1 billion. U.S. Compliance Consultants is a preferred service provider for all the major broker-dealer/custodians in the investment advisory profession including, Schwab Institutional, TD Ameritrade Institutional, Raymond James Financial Services, Scottrade Advisor Services and Fidelity (pending Summer 2009). For more information about U.S. Compliance Consultants, please visit www.uscomplianceconsultants.com.

Tweet. Tweet.

When the U.S. Securities and Exchange Commission starts Twittering, it is time for investment advisers to start to worry. Alas, for those of you who do not understand the meaning of the words “starts Twittering” most likely you are: (a) over 25 years old; (b) oblivious to the way information is now communicated in the social networking age; or (c) still wondering where documents go when you delete them from your computer (my best guess is Utica, New York). Up until a few months ago, I was certainly guilty on all three counts. After dedicating myself to learning the nuances of social networking, not only am I still guilty on all three counts, but I now seem to be in a constant state of nervous excitement (all atwitter, as it were).

For the previously uninitiated (such as myself), Twitter is a free social networking and micro-blogging service that enables its users to send and read other users' updates known as tweets. It is one of the many social networking web sites that allow users to communicate information to a willing audience.

So why am I all atwitter? Quite simply, the use of social networking web sites by registered investment advisers is rife with potential compliance violations. Whereas compliance is all about control and order, social networking is all about everything but control and order. Indeed, its raison d’être is the complete de-centralization of information. Someone in Des Moines decides to recommend your firm on their social networking web site and you might run afoul of the rules prohibiting the use of testimonials.  An employee tweets about the merits of your advisory firm and voilà, it is considered advertising and should be subject to your compliance policies and procedures. The number of things that can go wrong from a compliance standpoint should make any sane compliance officer contemplate a quick career change – prohibited advertising, unauthorized marketing, improper dissemination of nonpublic personal information, vindictive employees purposely spewing false information, well-intentioned employees inadvertently spewing false information and failure to maintain required records are just a few of the compliance issues implicated by the use of social networking web sites.

As if this were not enough to cause an adviser significant angst, the fact that the SEC is now twittering should be of additional concern. Indeed, one of their very first tweets discussed a recent enforcement action against an investment adviser. Whereas before an investment adviser’s transgressions were limited to a select few in the business that knew how to access such information, now there are literally millions of outlets and recipients ready to share in an adviser’s misfortune. Even more disturbing is the SEC’s newfound technological savvy. It stands to reason that if the SEC knows how to Twitter, then they certainly know how to troll the most popular social networking web sites looking for compliance violations. It is now very likely that anything posted to the public portion of an adviser’s social networking web site is being seen by more than just potential clients.

LinkedIn

LinkedIn is a business-oriented social networking site used primarily for professional networking (please see Kristen Luke’s series of guest posts on Advisor Blogger for a wonderful explanation of how to best use LinkedIn for marketing purposes). LinkedIn helps investment advisers connect with other investment advisers, clients and potential clients searching for an investment adviser. LinkedIn provides users with a choice of having their profile publically available (meaning anyone can see the information posted) or they can restrict access to a limited or known group of people.  LinkedIn has a “recommendations” feature that allows users to post recommendations and endorsements on the public profile page of other users. LinkedIn also contains a “request recommendations” feature that allows users to solicit recommendations for posting on their public profile page. 

Advisers must realize that any communication on an employee’s publically available social networking web site about your advisory firm is considered an advertisement. Because the Adviser Act’s prohibitions on advertising apply to electronic communications, advisers are ultimately responsible for communications about their advisory firm posted by their employees. Unfortunately, social networking sites such as LinkedIn are notoriously difficult to supervise. As most advisors already have a policy that requires pre-approval of any advertising, employee postings on such sites would create a de facto violation of the firm’s own policies and procedures in addition to any Adviser Act violations.

In addition, Rule 206(4)-1(a) under the Advisers Act states that “it shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act for any investment adviser registered or required to be registered under section 203 of the Act, directly or indirectly, to publish, circulate, or distribute any advertisement: (1) Which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser . . .” Clearly, testimonials on an advisory firm’s or its employee’s LinkedIn public profile would be a violation of this prohibition.

Recommended Compliance Actions

It is advisable for investment advisers to revise their compliance manual to incorporate policies and procedures regarding the use of social networking web sites by its employees. Investment advisers have three options:

1.     Allow employees to post information about the advisory firm, but require pre-approval for all such postings (this is the least desirable option as it is a supervisory nightmare);

2.     A limited prohibition against allowing any information to be posted to the public profile portion of any social networking web site; or

3.     An absolute prohibition against employees communicating any information about the advisory firm (other than the name of their employer) on a social networking web site.

While some advisers may opt for an absolute ban on employees having any presence on a social networking web site, I am not sure of the constitutionality of that course of action. Even asking employees to disclose all social networking web sites where they maintain a presence might be problematic. Investment Advisers must be sensitive to the fact that employees often have a legitimate concern about disclosing their presence on social networking (or any other) web sites that might be seen as “controversial” by an employer. This would be especially true with web sites dealing with religion, politics or sexual orientation. However, investment advisers should make all employees aware that posting any information about their advisory firm on a social networking web site is advertising and, as such, is subject to SEC prohibitions and firm policies and procedures. An advisory firm should also require that all employees – not just supervised or access persons – attest to the fact that they are in compliance with the firm’s rules regarding advertising and electronic communications. The firm’s chief compliance officer should also periodically visit the more common social networking web sites to ensure that there is no violation of the either Rule 206(4)-1 or the firm’s own policies and procedures.

Important Information (really)

Though each and every one of the opinions offered herein is guaranteed to contain at least one pearl of wisdom, these opinions are mine alone and do not necessarily reflect the viewpoint of U.S. Compliance Consultants, LLC.  Despite 100% certitude on my part as to their validity, please understand that an opinion is just that and is not intended to be treated as absolute fact or serve as the basis for a legal opinion.  Anything stated in this blog post is for informational purposes only and is not intended to address any specific situation or particular circumstance. Despite my efforts to always be completely accurate, the cold, hard truth is that this post may contain errors. At the very least, this post may reflect rules or regulations that were in effect at that time of posting, but are hopelessly outdated just a few months later.

As a result, the information imparted in this blog does not constitute legal, tax, accounting, financial or any other type of advice and does not create a client relationship with U.S. Compliance Consultants, LLC.  Of course, if you would like to become a client of U.S. Compliance Consultants, LLC, my sources tell me that they would be more than happy to have you join the fold. You need only give them a toll-free call at 888-798-2930 or visit their web site at www.uscomplianceconsultants.com.