The Securities and Exchange Commission charged an Illinois-based investment adviser with offering to sell fictitious securities on LinkedIn. The SEC also issued two alerts to highlight the risks investors and advisory firms face when using social media.

The SEC’s Division of Enforcement alleges that Anthony Fields of Lyons, Illinois offered more than $500 billion in fictitious securities through various social media websites. In the complaint, they cite a LinkedIn posting to promote fictitious “bank guarantees” and “medium-term notes”:

“Bank Guarantees, Cash Backed, Deutsche Bank, Credit Suisse, HSBC, JP Morgan Chase, BNP Paribas, UBS, RBS or Barclays, One (1) year and one (a) day, Fresh Cut USD 500 Billion (USD 500,000,000,000) with Rolls and
Extensions 40% or better plus 1% commission fee to be paid, to buy side and sell side consultants 50/50. First Tranche: 500M USD . . . . If you are interested you can email for particulars . . . .”

The SEC pulled out a laundry list of violations. Fields was not registered as a broker-dealer nor listed as an associated person a registered broker-dealer at the time of the postings. He later set up an unfunded investment adviser and unfunded broker-dealer. Fields provided false and misleading information concerning assets under management, clients, and operational history to the public through its website and in SEC filings. Fields also failed to maintain required books and records, did not implement adequate compliance policies and procedures, and held himself out to be a broker-dealer while he was not registered with the SEC.

The question I have is did someone turn in Fields? Or is the SEC searching social media sites looking for suspicious securities postings?

In the new investor alert, the SEC offers tips to help avoid fraud online. (.pdf)

If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution. An unsolicited sales pitch may be part of a fraudulent investment scheme.

The SEC points out the three big red flags:

1. It sounds too good to be true
2. A promise of guaranteed returns
3. Pressure to buy right now

In addition to the investor-facing alert, the SEC also issued a risk alert aimed at a registered investment adviser’s use of social media. It once again points out that while the social media platforms may be new, the securities laws are not. You can only use the shiny new tools in compliance with the existing regulatory regime.

“While many RIAs are eager to leverage social media to market and communicate with existing clients, and to promote general visibility, RIAs should ensure that they are in compliance with all of the regulatory requirements and be aware of the risks associated with using various forms of social media. The staff hopes that sharing observations from its recent review of RIAs’ use of social media as well as its suggestions regarding factors that firms may wish to consider is helpful to firms in strengthening their compliance and risk management programs.”

Sources:

• Administrative Proceeding — Anthony Fields, CPA D/B/A Anthony Fields & Associates and D/B/A Platinum Securities Brokers 
• SEC Charges Illinois-Based Adviser in Social Media Scam – SEC Press Release
• Risk Alert: “Investment Adviser Use of Social Media”
• Investor Alert: “Social Media and Investing: Avoiding Fraud”
• Investor Bulletin: “Social Media and Investing – Understanding Your Accounts”

The Federal Trade Commission is continuing to pursue bloggers who fail to disclose that they received incentives to discuss a company’s products. Back in December, the Federal Trade Commission released new guidelines that specifically required bloggers to disclose any material connections to a product or company they are writing about. The FTC is focusing its efforts on the company.

The latest company snared in the failure to disclose is Hyundai. The FTC took a close look at a promotion in which bloggers were given gift certificates as an incentive to include links to Hyundai videos in their posts or to comment on Hyundai’s Super Bowl ads. One focus was whether the bloggers were told to disclose or were told not to disclose that they had received compensation.

It seems Hyundai’s first defense was that it wasn’t their fault, but he fault of their advertising agency. The FTC won’t take that defense and pointed out that advertisers are legally responsible for the actions working directly or indirectly for them.

What saved Hyundai is that their established social media policy calls for bloggers to disclose the receipt of compensation. What saved Hyundai’s advertising agency was that their established social media policy calls for bloggers to disclose the receipt of compensation.

By having the policies in place, Hyundai and the advertising agency were able to establish that the bad actions were those of rogue employee operating outside the established policies of the firms. That’s compliance in action.

Sources:

• FTC Letter – Hyundai Motor America FTC File 112-3110 (.pdf)
• FTC Closes an Investigation Into a Blogging Promotion by Gonzalo E. Mon in Ad Law Access
• The Second FTC Action for Online Endorsements – prior post in Compliance Building
• FTC and Bloggers – prior post in Compliance Building

In January 2010, FINRA issued Regulatory Notice 10-06 in an attempt to provide guidance on the application of FINRA rules governing communications with the public to social media sites. The guidance did not provide much that was new. Largely, FINRA pointed out that the existing communication and record-keeping rules applied. Too bad that the site did not allow you to take the steps needed to comply with the existing rules.

Apparently, the guidance raised enough questions that FINRA decided to provide some additional guidance. It is not intended to alter the principles or the guidance provided in Regulatory Notice 10-06. Anyone expecting something new or innovative will be disappointed.

Q1: Does determining whether a communication is subject to the recordkeeping requirements of SEA Rule 17a-4(b)(4) depend on whether an associated person uses a personal device or technology to make the communication?

A1: SEA Rule 17a-4(b)(4) requires a firm to retain records of communications that relate to its “business as such.” Whether a particular communication is related to the business of the firm depends upon the facts and circumstances. This analysis does not depend upon the type of device or technology used to transmit the communication, nor does it depend upon whether it is a firm-issued or personal device of the individual; rather, the content of the communication is determinative. For instance, the requirement would apply if the electronic communication was received or sent by an associated person through a third-party’s platform or system. A firm’s policies and procedures must include training and education of its associated persons regarding the differences between business and nonbusiness communications and the measures required to ensure that any business communication made by associated persons is retained, retrievable and supervised.

The FINRA rules came first and they are in place for a good reason. It’s up to the firm to find a may to meet the compliance standards if they want to use third-party websites to publish information, communicate with the public, or communicate with clients.  If cloud providers want to take over company-hosted communications they need to but more effort into the record-keeping and compliance requirements of the business world.

Sources:

• FINRA Regualtory Notice 11-39 (.pdf – 8 pages)
• FINRA Regulatory Notice 10-06
• FINRA Issues Guidance on Social Networking Sites – prior post on Compliance Building

Social Media used by Investment Advisers

There is a growing trend in the financial services industry to use social media sites for outreach to existing as well as potential customers. Noticing this trend, the Securities Division of The Office of the Secretary of the Commonwealth surveyed investment advisers registered and doing business within the Commonwealth of Massachusetts. The purpose of the survey is to determine the scope of investment advisers’ use of social media, and what, if any, record retention and supervisory procedures have been implemented or utilized by those advisers. Empirical evidence is good to have.

The Division forwarded the social media survey to 576 investment advisers registered with the Division and located in the Commonwealth and 79% of advisers have responded.

• 44% of investment advisers used some form of social media
• Of those not using, 10% expect to use it in the next year
• A majority of investment advisers using social media fall within the 42-62 age bracket

The Survey also suggests that some advisers do not have policies relating to the retention or supervision of social media content, are not retaining social media content, and do not supervise the use of social media content.

• 69% of advisers using social media claimed to not have written record retention policies related to the retention of social media content
• 57% also did not retain all content posted on social media websites maintained (directly or indirectly), by the firm.

It should not come as  surprise that the Division concluded that additional regulatory guidance concerning the use of social media would be appropriate. We have already seen enforcement at the national level for the abuse of social media. I expect the states will be on board soon and including a review of social media as part of their examination and review process.

Sources:

• Report on Massachusetts Registered Investment Adviser’s Use of Social Media 
• Twitter Fail and Compliance

FINRA has long regulated and limited the ability of broker/dealers to communicate with the public. One of their missions is to protect the investing public from unscrupulous securities brokers. Twitter is a communications tools and any messages posted to Twitter will need to be in compliance.

It was inevitable that we would see a FINRA regulated party make a mistake using Twitter. The time has come.

FINRA also found that during eight months in 2009, the registered representative maintained a Twitter account and had more than 1,400 followers. Without notifying a principal of her employer firm, the registered representative posted 32 “tweets” related to a particular security. The tweets were unbalanced, overly positive and often predicted an imminent price increase. In the tweets, the representative failed to disclose that she and her family held a significant number of shares of the security. FINRA concluded that this conduct violated NASD Rules 2210 (communications with the public) and IM-2210-1 (guidelines to ensure that communications with the public are not misleading), and FINRA Rule 2010 (ethical standards).

To me, this sounds exactly like the behavior FINRA is trying to prevent by imposing Rule 2210 on financial representatives.

I don’t want to overstate the effect of this Twitter failure on the discipline. The registered representative was doing some other things in violation of the rules. I would guess that once a registered representative is under investigation FINRA takes a look at that person’s social networking activity to see if they have been doing other bad things.

Sources:

• FINRA Quarterly Disciplinary Review July 2011 (.pdf)
• Unbalanced Tweeting: FINRA Sanctions Broker for Twitter Usage by Joel beck in the BD Law Blog
• FINRA’s Guide to the Internet – prior post on Compliance Building

Image is 2008wmonroe by Liza P
CC BY-NC-ND 2.0

Over the past few weeks, Google+ has exploded as a new social web platform. We had friends on Facebook and followers on Twitter. Now there are Circles on Google+.

What does this mean from a compliance perspective?

Not much for right now. Google+ does not seem to present any new issues that we haven’t already seen in social media. My general impression is that it’s a hybrid of Twitter and Facebook. This is both in terms of privacy and the way communications flow.

I expect there will be a few hiccups with the privacy settings as we have already seen with Facebook. The use of “circles” allows you limit who can see your communications. But since anyone in that circle can then share it with people in their circle, any message can easily become public. If you want to keep you message a bit more private, there is a button that can check to prevent sharing.

To the extent you have a social media or communications policy you should make sure it takes into account Google+. To the extent you need to archive and preserve messages, you will need to take Google+ into account. Hopefully Smarsh and the other vendors will get access to the API so they can find a way to preserve the messages.

If you block access to social networking sites, Google+ is a little trickier to deal with. It looks like it operates as a subdomain on Google.com. I don’t think too many c0mpanies want to block access to Google.com. Your blocking software will need to make sure it only limits the plus.google.com subdomain. And it’s https:, not http:.

Will Google+ live long enough to be a concern for compliance? Maybe. I have a hard time believing people will use Facebook, Twitter and Google+. I suspect that Google+ will need to take users away from Facebook and Twitter to be successful.

I don’t suspect it will cause many people to abandon Facebook. Google+ is slicker, but Facebook has the bigger user base. As Andrew McAfee once told me, the new tool can’t just be a little better, it has to be many times better for people to switch.  I don’t find Google+ to be that much better than Facebook. Most importantly for me, Facebook has the largest collection of close friends and family. (My “Family” circle on Google+ is empty, my “Friends” only has a few handfuls of people, and my “compliance” circle has a single person.)

Twitter is the most likely victim of Google+. It removes the 140 character shackle and threads conversations together. Twitter still has better integration with other platforms. On the other hand, there is the possibility that Google+ could tie together many of Google’s other platforms.

It will be hard to kill Twitter. All of the news coverage about placing the valuation of Twitter in the billions of dollars are tied to Twitter’s latest round of raising money from investors. I would guess that the company is sitting on a big pile cash that will take a long time to burn through, leaving them plenty of cash to improve the product and find ways to generate revenue.

Google+ will cause more compliance headaches. For now, it doesn’t appear to create any new headaches.

Sources:

• Going in Google+ Circles by Katherine Boehret in the Wall Street Journal
• Google+ and the Unsettled World of Social Media by Andrew McAfeee
• Doug Cornelius on Google+

I’m once again speaking at the Enterprise 2.0 Conference.

Social Media & Social Networking: Some Cautionary Tales (Location: Room 312)

Social media (Twitter, LinkedIn) and enterprise social networking solutions (profiles, activity streams, social analytics) can deliver compelling business value. However, benefits do not come without risks. This panel discussion with experts and practitioners will provide insight as to the policy, governance, and security issues warranted to mitigate risks.

Moderator – Mike Gotta, Senior Technical Solution Marketing Manager for Enterprise Social Software, Cisco
Panelist – Julie LeMoine, Enterprise Collaboration, Innovation Expert
Panelist – Doug Cornelius, Chief Compliance Officer, Beacon Capital Partners LLC
Panelist – Stew Sutton, Principal Scientist, Knowledge Management, The Aerospace Corporation
Panelist – Suzanne McGann, Social Media Program Manager, Global Interactive Strategy, Medtronic

The session is Tuesday afternoon, 2:30 to 3:30 in Room 312 at the Hynes Convention Center. Stop by if you can.

In a tearful statement to the media, Rep. Anthony Weiner admitted he posted a lewd picture of his anatomy to Twitter. Not only that, he says he’s engaged in “inappropriate” online communications with at least six other women.

It was just a few days ago that I revisited the Fabulous Fab Rule:

Don’t write emails so provocative that they wind up reproduced on the front page of the Wall Street Journal.

That rule is focused on email which for many companies is archived for years. That means it could end up in litigation or an enforcement action. The rule is really applicable to any type of publishing.

The internet has turned us all into publishers, or at least given us the ability to be publishers. Traditional publishers have layers of review before information, stories, and pictures get published. On the internet, the only layer of review is your common sense. That’s all that stands between you and that send button.

Weinergate is just another example of failed common sense. He never should have hit that send button.

I have not found anything new in the scandal. I don’t think you need a new policy prohibiting people from sending pictures of themselves in their underwear. (I suppose there is an exception if you are in the adult entertainment industry.) Common sense should take care of that.

I suppose its useful to compare this to Eliot Spitzer. He had his own sex scandal, but it required a government investigation. Weiner merely shot himself by sending out a public message.

Sources:

• Anthony Weiner Admits to Sending Crotch Shot
• Weiner and the Same Old Social Media Lessons by Philip Miles in Lawffice Space
• Weinergate: Congressman Claims ‘Facebook Hacked’ as Lewd Photo Hits Twitter by Publius in Big Government .com
• Weiner Now Says He Sent Photos in The Wall Street Journal
• A Conservative Blogger Looks for Legitimacy in the New York Times
• Eliot Spitzer On Weiner’s Press Conference: It’s Not A Proud Moment, ‘Believe Me, I Know’ by Matt Schneider

Image of Meet Congressman Weiner is by David Boyle
CC BY 2.0

Congressman Bachus must have let one of his grandkids near the computer. The House Committee on Financial Services, of which Congressman Bachus is the chairman, has jumped into the world of social media. They have a Twitter feed, a YouTube Channel, a Facebook page and a blog: The Bottom Line.

Even though the SEC has not yet come out with its final whistleblower rule, the committee has set up its own whistle blower form. They have a comment box so you can send comments about legislation.

As for the blog,

“We will bring to your attention what we think is important and interesting. We will post what we’re reading and what we’re thinking. We will post short reaction pieces and longer thought pieces. We will blog about ideas and policies that we support and that we don’t support. We will try to entertain. Most importantly, we will try to engage our readers.”

It’s a nice, although extremely partisan, attempt to provide more information. I’m all for open government and an open discussion of the issues. Maybe using these communication channel will help bring more openness. Maybe they will just bring more grandstanding and partisan bickering.

One of the features on the committee’s website is Collateral Damage: the real impact of the Democrat’s bailout bill.  I get the sense that the website is more about political propaganda than open government.

Sources:

• The House Financial Services Committee Starts A Blog, Wants To Entertain You in the NYtimes.com DealBreaker
• Twitter feed for the Financial Services Republicans
• YouTube Channel for the Financial Services Republicans
• Facebook page for the Financial Services Republicans
• The Bottom Line – The blog of the House Committee on Financial Services
  

According to a story in Investment News, the Securities and Exchange Commission began a sweep of investment advisers’ use of social media and social networking last month.

The story hast a quote from Doug Flynn, an adviser at Flynn Zito Capital Management LLC, that is exactly on target for traditional investment advisers:

“I’d love to start tweeting to the general public once they can clearly tell me what I can and can’t do. However, putting yourself out there too much without specific guidelines is just not worth the risk.”

I don’t think the same is true for private fund managers who will soon have to register with SEC as investment advisers. How does the SEC’s regulation of Web 2.0 affect private fund managers once they register as investment advisers?

Not much.

Private funds are limited by the prohibition on general solicitation and advertisement.  They usually rely on Regulation D to keep from having to register the interests in their funds. Rule 502(c) of Regulation D states that “neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. . . “

The very public nature of social media and social networking sites are going to put them squarely in the box limited by this regulation. Even though there is some ability for a fund manager to use social media under the Investment Advisers Act, that ability is curtailed by the limitations under the Securities Act. Certainly, fund managers and their personnel can use web 2.0 tools for personal reasons and business reasons not related to advertising their firm or its funds. (You will notice that I don’t publish posts about my firm or its funds.)

Sources:

• Use of social media in focus by Jessica Toonkel in Investment News
• Whether the Advertising or Solicitation Was General in Nature Under Rule 502(c) – prior post on Compliance Building
• Advertising or Solicitation to Offer or Sell Securities Under Rule 502(c) – prior post on Compliance Building
• Fund Raising Publicity – prior post on Compliance Building