The Role of Social Media in the Compliance World

These are the speaking notes from this session at PEI’s Private Fund Compliance Forum 2012.

Panelists:

• Me
• Gerry Esposito, Managing Director, CFO & CCO Newbury Partners LLC

Audience Polls

• Registered with the SEC as investment advisers?
• How many just registered in the last few months (been Dodd-Franked)?
• Also registered as broker-dealers?
  (We are not covering FINRA Rules)
• Retail customers as well as funds?
  (Rules on Supervised persons)

Social Media and Fund Marketing

Investment Advisers Act

• (Assuming most of the audience is recently registered) the Investment Advisers Act permits marketing and advertising, as long as it is not fraudulent, deceptive or manipulative.
• Not going to address the SEC rules in advertising in any detail.
• Assume that publication of information through social media is likely to be considered advertising.

Rule 506

• Even though advertising permitted under Advisers act, sales of LP interests in your funds are subject to the private placement rules. That means private and no “general solicitation or advertisement.”
• Twitter, Facebook, or blog posts mentioning your fundraising could violate the ban and blow your private placement.

JOBS Act

• Orders the SEC to lift the ban on general solicitation and advertisement.
• July 4 deadline for the new SEC rule revising the Rule 506 limitation
• Also says the ban should apply to all federal securities laws so the nonpublic limitations under IC 3(c)(1) and 3(c)(7) should also be raised

You can, but should you?

• Expect to attract investors through social media
• Expect to source deals through social media
• Examples:
  • Fred Wilson of Union Square Ventures,  A VC blog: http://www.avc.com
  • Beacon uses Facebook and Twitter for retail property level marketing
• SEC use of social media – Use twitter to send out updates.

Fraud

• First SEC case involving IA and social media was Anthony Fields
  http://www.sec.gov/news/press/2012/2012-3.htm
• Used LinkedIn to make multiple fraudulent offers of fictitious bank guarantees
• That uncovered lots of other deception

Social Media and Employees

SEC Rules

• SEC National Examination Risk Alert – Investment Adviser Use of Social Media
  http://www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf
• Ban on testimonials
  • Linkedin Recommendations could act as a testimonial
  • Facebook Like button could be considered a testimonial
  • Re-tweeting – is it an endorsement of the message

Recordkeeping Requirements

• SEC’s recordkeeping requirements are media neutral, so social media is subject to the SEC’s recordkeeping requirements.
• Unlike email, records are in the cloud and subject to the whims of the platform. They don’t care that you have recordkeeping requirements
• Third party provider to capture if need to meet record keeping
• If marketing – need to keep a copy for six years. If sent to 10 or more people
• If investment advice to a client – need to keep a copy for six years. Not applicable to funds.

Social Media and General Employment Issues

• NLRB rulings
  • limits ability to discipline employees  for comments made on social media.
  • Example of complaining about company on Facebook – company was wrong to fire
• Respect of confidentiality
• Conflicts with fund communications to investors