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Social Media--Business Tool or Compliance Trap

There is no doubt that the use of social media could have great value and yet the rules have yet to be written by regulators.

Judith A. Hasenauer, 03/07/2013

We have written in the past about the risks of financial planners utilizing social media in their businesses. Since then, social media has become even more ubiquitous and now seems to pervade all forms of business activity in every type of business. We have always been concerned about the compliance risks attendant to incautious use of social media by people in regulated businesses--particularly spaces as heavily regulated as the insurance, stock brokerage, and investment advisory businesses. There is no doubt that the use of social media in these businesses could have great value for prospecting for clients as well as for advising clients about products and services. Yet, the rules applicable to social media have yet to be written by regulators, and use of social-media tools is almost completely at the risk of the insurance agent, stock broker, or investment advisor using them. 

The life insurance regulators have not, as yet, adopted the same pervasive rules relating to communications as have the regulators for stock brokers. Investment advisors are becoming exposed to more and more communications rules that are driving them toward the same rules that apply to stock brokers. However, there is still a lot that remains to be written as to what regulator will oversee investment advisors in the future and what rules will apply. Nevertheless, we believe that caution is still the benchmark for all elements of the financial-services industry; if not for fear of regulatory-enforcement or compliance-enforcement actions, then to avoid litigation from unhappy clients that often use communications out of context. 

Life insurance regulators are in the process of implementing "suitability" rules for the sale of annuities on a state-by-state basis, and it is likely that similar actions will eventually develop for sales of life insurance as well--at least for cash-value life insurance. Communication is at the heart of suitability standards, and social-media communications can certainly be a key element in determining suitability. Communications by stock brokers have long been subject to comprehensive rules regarding what can and cannot be communicated. If, as appears possible, the same or similar rules applicable to stock brokers are applied to investment advisors, social-media communications will need to be rigidly overseen and controlled. 

We do not believe that the current regulatory structure is clear enough that widespread use of social media is worth the risk, no matter how valuable it can be. The broker-dealer community has had to deal with this question since the Internet first became popular. Many broker-dealers forbid the use of social media in business transactions and even forbid the use of the service for any communication with clients, including nonbusiness communications. Other broker-dealers limit social-media use to only certain types of communications. We know of few that do not carefully oversee social-media communications with clients or prospective clients as a fundamental element of the compliance process. 

If social media is to be used in a business context, it is critical to determine what form of communication is to be used. Obviously, sales materials are subject to the same rules as printed materials. Likewise, prospecting materials, preapproach materials, and even routine communications fall within the purview of the rules applicable to printed materials. 

Internet communications such as emails are subject to serious oversight and archiving requirements. Like radioactive materials they have a half-life that seems almost permanent. Emails can be taken out of context years after they are sent and can haunt financial planners many years in the future when market conditions make clients determine they have been permitted to engage in "unsuitable" investing. Emails are not necessarily the same as social-media communications. Many broker-dealers and investment advisors use emails as administrative tools to communicate with clients. This is an appropriate form of communication that can expedite investment decisions. We do not recommend social media be used for the same purpose. 

The best advice available for those of us who work in regulated industries is to utilize the compliance process put in place by our employers or those in similar positions. Compliance is a growth industry in the financial planning field, and it is a rare month when we do not receive inquiries from executive search firms looking for experienced compliance executives. Unfortunately, many financial-services professionals tend to resent compliance personnel characterizing them as the "sales-prevention department." 

Yet, a good compliance program, implemented by seasoned compliance executives can be both a sword and a shield. When defending enforcement actions, we always ascertain if the respondents followed their own rules. If they did not, we can expect an adverse outcome. If compliance rules are followed, particularly when it comes to suitability determinations and communications, we are well on the way toward a favorable outcome--unless the compliance rules are obviously defective. 

Judith A. Hasenauer, JD, CLU, is an attorney with the law firm of Blazzard & Hasenauer, P.C. She devotes her practice exclusively to the financial services industry, providing consulting on the development and regulatory clearance of products, compliance issues, distribution issues and related matters, such as advisory activities and industry initiatives.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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