January 2012—Legislative Intelligence Update | SEC, FINRA Ramp up Focus on Social Media

Welcome to this edition of IMCA's Legislative Intelligence update. This month's update discusses the SEC's and FINRA’s recent guidance to firms on the use of interactive social media sites by financial advisers. 

The purpose of this update, prepared by Potomac Strategies for IMCA, is to give members legislative and public affairs intelligence and analysis; it is strictly informational and should not be relied upon as legal or compliance advice.  Nor does IMCA, as an education and credentialing organization, lobby Congress, regulators, or advocate for any particular legislative or regulatory position either on its own or through its relationship with Potomac Strategies.

If, after reading this update, you have additional questions, please contact IMCA using the "Questions? E-mail IMCA" button at the bottom of this email. We will either respond personally to your inquiry or include a response in an upcoming issue.
_____________________________________________________________________________________

Flattery can get you everywhere—unless you are a financial adviser on Facebook.  Watch out in particular for that ubiquitous "like" button after your bio—your friendly regulator may not agree. 

The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) are beginning to pay more attention to social media sites, and both independent investment advisers and those who are dually registered as brokers should pay heed.  The SEC earlier this month, following a sweep of investment adviser firms, issued a risk alert on social media do’s and don’ts for investment advisers. As such, advisers should keep in mind, for example, the broad prohibition on client testimonials. Even the mere use of a "plug-in," such as a "Like" button, according to the SEC, could be construed to be a client testimonial.

The SEC’s Risk Alert is the latest in a series of regulatory notices that began with a FINRA regulatory notice to broker–dealers in January 2010, and additional clarifications added last August. 

For independent advisers in small firms, the appropriate response may be simply updating the firm’s compliance policy to address the use of interactive websites such as Facebook, LinkedIn, Twitter, blogs, and the like from other requirements covering solicitors, client communications or the firm’s static website. Of course, they also will need to ensure that the firm’s advisers are aware of and will adhere to the new policies. State securities commissioners have not developed a model rule for state-registered registered investment advisers, although Massachusetts is reported to have one in the works.

For dual registrants, the distinguishing factors may be more complex, given FINRA’s varying recordkeeping requirements for client and other communications. Additionally, FINRA is concerned that certain third-party links that could lead to an "entanglement theory" if the firm either pays for the content or appears to endorse certain communications from social media sites.

Dual registrants should keep in mind that broker–advisers are subject to all securities laws, and therefore should keep the requirements from both regulators—FINRA and the SEC—in mind. Each broker–dealer, of course, may adopt additional restrictions and training requirements to ensure firm-wide compliance.

The SEC demonstrated that it meant business about cracking down on social media compliance, accompanying its risk alert with a news release of a recent enforcement action taken against an investment adviser that allegedly offered $500 billion in fraudulent securities over LinkedIn and other social media sites.

2012 Legislative and Regulatory Outlook

With the House and Senate returning to session in the next few weeks, industry watchers are wondering how much legislative business will be conducted in the middle of gridlock and an election year.  Congress is expected to leave Washington no later than early October to campaign for re-election, cutting short the legislative calendar by at least several weeks.

Tax Reform

Don’t expect much in the way of legislative accomplishments this year beyond agreeing to a fiscal year budget. Congress is not expected to pass any major retirement plan legislation, although the tax-favored treatment of qualified plans may be part of any tax code overhaul in 2013.

If tax reform is taken up this year, the so-called extenders—including a tax credit for research and development, deductions for state and local taxes, and alternative minimum tax—may not occur until the end of the session.  And even then, some are predicting it may not happen until December, in a lame duck session of Congress.

Nor is it likely Congress will grapple seriously with the Bush tax cuts and the estate tax, leaving many wealth managers and estate tax experts in limbo for another year. If Congress does not act by the end of 2012, the current estate tax exemption level of $5 million would drop to $1 million, as the law currently stands.

Securities Reform

The question of whether Congress will establish a self-regulatory organization (SRO) for investment advisers also is up in the air. Although an SRO bill may pass the Republican-controlled House, significant resistance by the Democratic-controlled Senate is likely.

At the SEC, increased pressure to come up with cost-benefits for a whole host of new rules—including the widely anticipated uniform fiduciary rule for brokers and advisers—has slowed down considerably.  Even if a fiduciary rule is proposed and adopted this year, expect a legal challenge to stay the effective date until the issue is resolved in court.