Four thousand investment advisors with $100 million or less of assets under management will – in most cases – no longer be regulated by the U.S. Securities and Exchange Commission after July 21, 2011. The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law last year will turn mid- to small-size operators over to state securities regulators. So what guidance will be provided to advisors using or thinking about using social media?
The answer is not encouraging.
Using Facebook’s search box, I recently conducted an unscientific survey to determine how many investment advisors use the social media platform and discovered advisors from Memphis to Staten Island to Sacramento to Pittsburgh to Scottsdale with cities in every corner of the nation in between. A search on LinkedIn using the advanced “find people” search feature lists well over 100,000. Admittedly, many are insurance agents, marketers and recruiters. But it is beyond debate that the number of investment advisors using social media today is great. Many operate in a compliant manner. If they trade through a broker-dealer that is a FINRA member, then the b-d must be compliant. But many advisors are small shops and do their own trading.
Do state regulators understand social media compliance?
Maryland Securities Commissioner Melanie Lubin serves as the North American Securities Administrators Association (NASAA)
lead on the investment advisor switch from federal to state regulation. During a recent webinar sponsored by the Financial Planners Association-National Capital Area (FPA-NCA), Lubin was asked about guidance by state regulators in the use of social media.
“At the moment,” said Lubin after a long pause, “I don’t know of anything that’s about to come out on that.”
Some 400 firms in Maryland fall under the jurisdiction of that state’s securities division. Current law requires a firm with $25 million or less of assets under management to be regulated by the state in which it is headquartered. After July 21, when the ceiling rises to $100 million, a hundred more will fall under Lubin’s watchful eye.
In Virginia, where I live, Division of Securities & Retail Franchising Chief of Regulation Al Hughes is more forthcoming. During another webinar on March 15, co-hosted by FPA-NCA and downstate affiliates, Hughes was also asked about the regulation of social media by investment advisors in the Commonwealth.
“We’re looking at that; taking it on right now,” declared Hughes. “We have seen its use by younger advisors to acquire clients.” He went on to say that there must be records, “electronic or paper copies,” for examination when required by state examiners. Virginia has three examiners to oversee what will soon be 450 investment advisors under the state’s jurisdiction.
Other states have their own issues. New York doesn’t have a state exam program for investment advisors at all. The Investment Protection Bureau of the New York state attorney general’s office is still trying to figure out what to do. Wyoming has no jurisdiction over investment advisors. So examinations in both states are likely to remain in the hands of the SEC.
Important issues need to be digested by smaller advisors, including what qualifies as an asset by their new regulator? How does each state define performance fees? How do custody rules work?
But when it comes to what some say is the greatest revolution in communications since Guttenberg’s invention of movable type, many state regulators seem generally out to sea. To make matters worse, many states are essentially bankrupt, struggling to carry out their responsibilities.
Will states look for guidance from the SEC? Unlikely, due to the overwhelming number of old and new issues on the federal regulators’ plate in the aftermath of Dodd-Frank and the refusal of the Republican majority on the House Financial Services Committee to consider a funding mechanism or a budget increase. In time, there will be enforcement actions that may serve as guidance.
FINRA, on the other hand, issued its now-famous Regulatory Notice 10-06: Guidance on Blogs and Social Networking Web Sites in January 2010. Criticized for not going far enough, FINRA reconvened its Social Media Task Force on March 10, 2011, in an effort, in the words of FINRA Senior Vice President Joseph E. Price to become “more creative.”
As one top FINRA executive told me recently, “At least we’re trying.”