Social media's role in businesses has expanded further with the advent of social selling. As more enterprises leverage social media networks to market and sell their products and services, new SEC compliance requirements for social selling are now in place.
But what is SEC compliance for social selling? And how are the new requirements affecting businesses and their social selling procedures?
SEC compliance, for the most part, is a vital concern of the investment landscape, requiring firms to adhere to regulations set forth by the Securities and Exchange Commission (SEC). To ensure success in this ever-changing market environment, staying up-to-date with these requirements is essential.
In 2021, the SEC finalized reforms to the Investment Advisers Act of 1940 to modernize rules that govern investment adviser advertisements and payments to solicitors. For financial advisory firms, some of the changes that were incorporated will have a direct bearing on instances when advisors leverage social media to market to prospective clients and how compliance requirements for archiving such communications are handled.
Key amendments to the Act evolved the definition of what is considered to be an “advertisement.” The new rule amends the definition of “advertisement” in critical ways. The Securities and Exchange Commission (“SEC”) adopted amendments to existing Rule 206(4)-1 (the “Advertising Rule”) and rescinded Rule 206(4)-3 (the “Cash Solicitation Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”). The SEC also made related amendments to Form ADV and Rule 204-2, the books and records rule.
The new rule takes into account more types of advertising practices than the prior rule, including the practice of social media marketing, also referred to as “social selling” in industry parlance. Specifically, the reform states the use of social media can be considered an advertisement if the communication includes hypothetical performance marketing of services, even if communications are made to just one person. (Exclusions would be if the communication is provided in response to an unsolicited request, or to a prospective or current investor in a private fund.)
So essentially, if an investment advisor utilizes a social media post or direct messages to promote their financial services, such a communication can be considered an advertisement. And why is that important? Well, for starters, the SEC also adopted related amendments to Rule 204-2 (the “Recordkeeping Rule”) that now require investment advisers to make and keep records of all advertisements (as defined in the new rule).
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Specifically, the SEC states, “investment advisers must make and keep records of all advertisements they disseminate.” Additionally, the final rule does not prescribe or prohibit any particular method of maintaining records, but it does require the adviser to maintain and preserve these records “in an easily accessible place for a period of not less than five years, the first two years in an appropriate office of the investment adviser, from the end of the fiscal year during which the investment adviser last published or otherwise disseminated, directly or indirectly, the…advertisement.”
So what are the key takeaways?
- Ensure new communication apps are compliant. If your advisors are using LinkedIn, Facebook, WhatsApp, Telegram, or any number of modern communication apps to market services to prospective new clients, then you need to maintain a digital archive of all those communications.
- Centralize your digital archive. Because these types of outreach must be preserved in an “easily accessible place” for at least two years within an appropriate office of the business, you need to maintain a centralized digital archive of all social selling communications for all advisors, which can be easily searched for legal readiness.
These SEC compliance reforms were fully enacted on November 4, 2022. It is also important to note that a $200M enforcement action against one of the largest banks relating to records preservation requirements concerning business communications indicates the SEC is serious.
Conclusion: These changes are here, and investment advisors must now position themselves to maintain compliance with these new SEC regulations in the coming years. They have to be ready to capture all of the social media communications of their staff that promote their financial services to prospective customers. If they don’t, they will find themselves vulnerable to costly and unavoidable regulatory fines.
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