Social media may be considered the new frontier in reaching prospective clients but recent regulations in the US suggest a potential regulatory minefield for financial advisers that may not have been considered.
Unlike the US, regulations in Australia have not evolved as fast as social media which could pose a compliance risk to advisers without them realising it.
In the US, registered financial advisers must abide by rules set down by the Financial Industry Regulatory Authority (FINRA) aimed at blogs and social networking sites.
Similar to other forms of communication, social media exchanges must be archived and tracked – a process that would have typically been onerous, but is becoming more seamless through the advent of new technology.
According to FINRA’s regulations, advisers should never present false or misleading claims or representations to investors and it is the responsibility of firms to provide appropriate supervision to those approved to use social media.
They shouldn’t recommend an investment product via social media – although the regulations around what counts as a ‘recommendation’ are not clear cut – and it is up to the firm to consult with FINRA regulations to determine if the post qualifies as a recommendation.
Posts about investment products that are considered recommendations trigger a requirement for it to be suitable for every investor to whom it is made – a bit of a worry if you consider that the average Facebook user has several hundred friends; it’s simply not possible to ensure your recommendation is suited to all of them.
Another interesting differentiation is whether the forum is considered static or interactive. If something is posted on a forum that is considered static, the post is considered an advertisement and therefore must be approved. However, if a forum is considered interactive the post is not considered an advertisement and preapproval are not required. Examples of static content include profiles, background or wall information.
Whilst Twitter and Facebook real-time posts are considered interactive, therefore do not require a pre-approval process, where the line ends for static and begins for interactive posts in Facebook seems open to interpretation. Blogs sit in the grey territory – they are considered static but the real-time interactive communications, posts, are considered interactive.
Clear as mud? The task of writing regulations on a tool that is constantly evolving is not an easy one but it does pose questions about the implications for Australia as the communication channel of social media grows.
ASIC recently released a draft regulatory guide which sets out best practice guidance for advertising of financial products and advice but has not yet provided regulations for use of social media by advisers.
While all advisers should consider social media as a tool for networking with potential and existing clients, it’s important to be aware of the possible repercussions if Australia follows in America’s footsteps.