There is no denying the prominent role that social media has taken in our lives. We are confronted daily with phenomena such as Twitter, LinkedIn and Facebook. Their member totals have grown exponentially and their IPO’s are valued at billions of dollars. Thus, it is no wonder that social media websites are attracting the attention of the business world: They offer an easy and free communication platform to connect, inform and interact with customers.
Although the majority of Wall Street still prohibits employees from using Twitter and Facebook in the office, more and more firms are discovering the strategic value of using social media posts as a supplement to their other corporate communications. For example, Deutsche Bank recently allowed one of its investment bankers to post about IPO’s on Twitter.
But the legal risks of these communications should not be underestimated. The emergence of social media may be a godsend for the marketing department, but it is a nightmare for many compliance officers. Since the use of social media channels involves the dissemination of information, it must comply with federal securities laws, including antifraud, compliance, and recordkeeping provisions.
Plenty of securities laws give rise to uncertainties when it comes to their application to social media. For example, the Regulation Fair Disclosure (“Regulation FD”) prohibits selective disclosure of non-public, material company information. But it is not always clear whether a twitter message or blog post would be considered public disclosure. Another example is SEC Rule 10b-5. This antifraud rule applies to all company statements, including tweets and blog posts. Statements by employees acting as company representatives online will give rise to liability when they include material misstatements or omissions in relation to the purchase of a security. Given the 140-character limitation on tweets, omissions are almost bound to occur. Exchange Act Rule 14a-17, regarding proxy solicitations, permits the use of electronic shareholder forums to facilitate communications, but it is uncertain whether social media channels would enjoy protection of the rule. And when it comes to private offerings, companies must refrain from offering or selling securities through general solicitation or advertisement under Regulation D. It is unclear what types of social media communication would constitute a general solicitation.
On top of all this, there are some additional concerns with regard to investment advisers that market securities on the internet. Investment firms, dby their nature, are particularly prone to compliance issues with social media. Attention should be drawn to Rule 206(4)-1(a) of the Advisers Act which imposes a number of recordkeeping obligations on registered investment advisers (“RIAs”). As currently designed, social media may not allow you to archive and maintain the communications on your own books and records
Back in 2009 the Financial Institution Regulatory Authority (FINRA), the largest private self-regulatory organization for securities firms, created a Social Networking Task Force to deal with these issues. In its Regulatory Notice 10-6, FINRA advises firms to develop clear policies and procedures for the use of social media and to retain records of all such communications. Last year, FINRA suspended and fined California broker Jenny Quyen Ta for sending “misrepresentative and unbalanced” messages on twitter. She had, without notifying her firm, pushed certain investments via Twitter, but had failed to include in her 140-characters-tweets the fact that she herself held stakes in those investments.
With this endless list of liability risks, is a firm better off completely banning social media use? On January 5th, the day after it accused investment advisor Anthony Fields of selling fictitious securities on Linkedin, the SEC issued its first ever Social Media Risk Alert in order to provide some information on three main topics: compliance strategies, third-party postings and record-keeping obligations.
First, regarding compliance strategies, the alert urges firms to adopt specific social media use compliance programs, rather than relying on the existing general programs that may lack specificity. Second, it addressed third-party postings. Social media often allow third parties to comment on postings, or even to express their opinions through “like” buttons. Again, the alert recommends implementing explicit policies and procedures on what types of third-party postings are permissible. Finally, in accordance with record-keeping obligations under the Advisers Act, the alert explains that adviser’s records of social media communications must be preserved if they contain information that satisfies the recordkeeping obligations.
It is clear that as our society keeps on evolving in this digital age, securities laws must be interpreted and adapted to new technologies. Although tweeting, posting and blogging may have many advantages for Wall Street firms, recent examples show that caution is necessary when wading into such uncharted territory.