Much has been made about FINRA’s Regulatory Notice 10-06 and how that will affect the social media use by registered representatives. Looking beyond the broker/dealers, I thought it would be interesting to see what mutual fund companies are doing with social media. I’ve started seeing some mutual fund companies starting to dip their toes into web 2.0.
Key Regulations Governing Advertising of Mutual Funds
Mutual funds are highly regulated under the Investment Company Act and the Securities Act. The interests in the funds themselves are securities and are governed by the Securities Act. As a security, that means under Section 5.(b)2 of the Securities Act you can only use a prospectus to advertise it.
Under Rule 482, the SEC allows mutual funds some additional flexibility is advertising their products. If an advertisement meets the disclosure requirements of the rule, then the advertisement will be deemed a “prospectus.” (Which means you won’t be illegally selling securities.)
Required Disclosure under Rule 482
There is long list of requirements in the advertisement. Here are just some of them:
- Point out that investors need to consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing.
- Explains that the prospectus and, if available, the summary prospectus contain this and other information.
identifies a source from which an investor may obtain a prospectus and, if available, a summary prospectus;
- You should read the prospectus carefully before investing.
- Advertisements that includes performance data have to point out that past performance does not guarantee future results (along with extensive limitations on how you can disclose performance)
- Money market funds must point that they are not federally insured and you can lose money. (Hello Reserve Fund!)
- Disclosure statements can’t be in fine print
Advertisements then need to be filed with the SEC under Rule 497 or with FINRA. (Most do the FINRA filing.) You have to file the advertisement with FINRA within 10 days of first use or publication [FINRA Rule 2210(c)].
How can you do all of this with web 2.0?
One key aspect of web 2.0 is that it allows anyone to be a publisher. But now you’re a publisher without any training on how to be a publisher. In the case of mutual fund companies, publishing will have to go through a long process of review and approval before content can be published. Failure to comply has serious consequences.
That doesn’t mean that mutual fund companies cannot use social media. It just means they can only use is it certain ways.
If you’ve gone through the trouble and expense of creating compliant content, you should make it available in as many ways as possible. You obviously can’t push all of the required disclosures through the 140 characters of Twitter. But you can send links back to your website where you can make all of the disclosures. If you have video, you can publish the video on Facebook and YouTube.
If you want to have a good day fishing, you need to go where the fish are. (See the picture above.) Push your content to potential customers in the places where they are. Some of them (many of them?) may be spending time on Web 2.0 sites.
- Putnam Investments
- Legg Mason
- American Century Investments
Photo © Adrian van Leen for openphoto.net CC:PublicDomain