Texting, tweeting and emailing are second nature to people these days, but financial advisers who use social media in the wrong way are getting into trouble. If you’ve gotten a personal text or seen some tweets touting great investment returns, take a closer look. They could be some pretty serious red flags.
The Securities and Exchange Commission (SEC) recently fined two robo-advisers, Wealthfront Advisers and Hedgeable, for social media pitfalls. The proceedings are the SEC’s first enforcement actions against robo-advisers, which provide automated, software-based portfolio management services. Both companies were charged with violating rules on recordkeeping, antifraud, advertising and compliance.
In December the SEC fined Wealthfront – one of the nation’s largest robo-advisers, with $11 billion in assets under management — $250,000 for improperly retweeting prohibited client testimonials, paying bloggers for client referrals without the required disclosure and documentation, and failing to maintain a reasonable compliance program.
Tweet Problems at Wealthfront
Wealthfront used Twitter to post advertisements and communicate online with clients but didn’t always preserve copies of the ads or retain communications made through its Twitter account relating to recommendations or advice given to clients. It retweeted positive posts by other Twitter users whom it knew or should have known had an economic interest in promoting Wealthfront, without disclosing these conflicts of interest. For example, some of the retweeted posts originally were made by Wealthfront employees, Wealthfront investors, and Wealthfront clients who received free services if a reader used the client’s personalized landing page to enroll with Wealthfront. The firm’s policies and procedures did not ensure that all retweets were assessed by the Compliance Department before being posted, as required by SEC rules.
The SEC also found that Wealthfront made false statements about a tax-loss harvesting strategy that it offered to clients. It told clients that it would monitor all accounts for transactions that might trigger a wash sale, but failed to do so. The robo-adviser agreed to pay the fine without admitting or denying the SEC’s charges.
What Happened at Hedgeable
A separate SEC order fined a New York City-based robo-adviser, Hedgeable, $80,000 for misleading statements about its investment performance. According to the order, from 2016 until April 2017, Hedgeable posted on its website and social media purported comparisons of the investment performance of Hedgeable’s clients with those of two robo-adviser competitors. The performance comparisons were misleading because Hedgeable included less than 4% of its client accounts, which had higher-than-average returns. Hedgeable compared these figures with rates of return that were not based on competitors’ actual trading models.
The SEC alleged Hedgeable failed to maintain documentation or a reasonable compliance program. Like Wealthfront, Hedgeable agreed to pay the fine, without admitting or denying the SEC’s findings.
“Technology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “Regardless of their format, however, all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.”
Brokers Face Thousands in FINRA Fines
The Financial Industry Regulatory Authority has also taken action recently to crack down on improper use of social media.
One broker was fined $20,000 in November 2018 (opens in new tab) and suspended from association with any FINRA member in all capacities for 18 months. He consented to the sanctions and to the entry of findings that he caused his member firm to fail to comply with its recordkeeping obligations by using text messaging and his personal email account to engage in business-related communications with a customer. These communications included a written complaint alleging that the broker failed to follow the customer’s instructions, which the customer alleged cost him about $300,000 in damages.
The broker did not take steps to retain or provide his firm with any of the texts or emails, all of which were deleted. Additionally, FINRA found that the broker attempted to settle away two customer complaints and did not tell his firm about the complaints or his efforts to settle them.
In a separate case that same month, another broker was fined $10,000 because he used a personal email account to conduct his securities business, including to communicate with customers and prospective customers. The findings stated that the broker’s firm discovered he had been using personal email to conduct some of his securities business and requested that he provide his account password so that the firm could review the situation. Although the broker at first provided his password to the firm, he subsequently began deleting emails, and then changed his password. The findings also stated that by using personal email to conduct his securities business, the broker caused the firm to maintain inaccurate books and records.
Another broker was barred from association with any FINRA member in all capacities. The findings stated that the broker had been discharged for the firm’s loss of confidence in him following an internal investigation into allegations in a customer complaint, violation of firm policy by using personal email to communicate with the client, and failure to obtain firm approval for a letter verifying investment income on behalf of the client.
The Takeaway for Financial Advisers and Their Clients
The recent SEC and FINRA compliance priorities reveal that regulators are focusing on the evolving tech landscape and addressing the regulatory concerns. Regulators are clearly not wasting any time penalizing firms and individuals for electronic recordkeeping violations. The SEC Office of Compliance Inspections and Examinations (OCIE) priorities letter noted “text/SMS messaging, instant messaging, personal email, and personal or private messaging” are covered by the Books and Records Rule Rule 204-2, and reminds advisers of their obligations when using electronic messaging.
The above text message case is the highest FINRA fine to date against a broker for using a personal device to text clients. FINRA is also going after brokers for using personal email to conduct business. I am often asked how regulators find out whether firms and/or advisers are using unauthorized communication channels to conduct business. The above text message and personal email cases offer great examples. The text messages and personal messaging are provided by clients and used as evidence during the course of a FINRA investigation.
For financial advisers:
The above cases emphasize the importance of archiving and capturing all electronic communications. Engage an archiving vendor that is compliant with the regulatory rules and has the technical ability to capture messaging data including those on popular apps and tools like Twitter, Facebook, Slack, LinkedIn, and text messages. Make sure to select a vendor solution with critical supervision capabilities, such as flagging keyword lexicons, and robust reporting options. The regulators are aware of the rapidly changing tech landscape as electronic communications are under the regulatory microscope.
Do your homework. Investors should stay informed and make sure their financial advisers are compliant with the regulatory rules. A great way is to conduct a background check of the firm or broker. FINRA’s BrokerCheck (opens in new tab) is a free tool to confirm not only licensing and registration, but also whether an individual or firm has a history of complaints or regulatory problems. BrokerCheck helps you make informed choices about brokers and brokerage firms and provides easy access to investment adviser information. You can also conduct a search for FINRA disciplinary actions that were issued. Results include opinions issued by the SEC and federal appellate courts that relate to FINRA disciplinary actions that have been appealed.
Finally, be the skeptic. If your financial adviser is trying to take the communication offline from work email to personal, that’s a red flag. Advisers should always be using their work email for compliance purposes. This allows the firm to monitor email and other electronic communications for any potential wrongdoing or violations.
It’s important for all investors to protect themselves from falling prey to deception that can occur through electronic communications channels, which will continue to be the norm for brokers and advisers to conduct client business. So don’t be afraid to ask your investment adviser about their policies and procedures around messaging and other electronic communications!
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