Regulators offer some clarity for social media guidelines

While some financial service dealers are using social media to connect with clients, they have been doing so cautiously. In an environment that is changing as quickly as the social media space, Canadian regulators have been slow to iron out hard and fast rules for electronic communication and social media compliance. The regulators are classifying electronic communication including social media the same as advertising and sales communications and while the core rules concerning advertising and business communications have not changed, more clarity has been established by regulators to help. Dealers are still left to develop their own policies and procedures regarding social media including designing systems for compliant monitoring functionalities which will be subject to audit.

Fiona Collie, contributor with Investment Executive, reviews this issue in the following article.

If you have been using social media for connecting with clients — or thinking of doing so — the slow response from regulators on the rules of the game may have been frustrating. But now that they’ve brought some clarity to the issue, advisors and their firms can be more confident about using social media to build strategies and procedures to reach out to clients and prospects.

In fact, this may be a great time to start getting more involved with social media. An Ipsos Reid poll from July 2011 found that 60% of Canadians with access to the Internet use social media. And Internet use is spreading through older age groups. The poll found that 62% of Canadians aged 35 to 54 are online. Another 43% aged 55 and older are also hooked up. As more Canadians turn to social media, it may become important for advisors to take their marketing plans online in order to reach current and future clients.

So far, the industry has been slow to embrace social media as a marketing tool because of concerns over compliance. But the recent release of guidelines by regulators has eliminated some of that fear. In December 2011, the Toronto-based Investment Industry Regulatory Organization of Canada (IIROC) published guidelines. In essence, the regulator groups client communication via social media with the current rules for advertising and sales literature and correspondence.

IIROC guidelines

“While the technology may be new and evolving rapidly, the basic compliance obligations and regulatory requirements are not,” states Paul Riccardi, Toronto-based senior vice-president, enforcement, member policy and registration for IIROC, in an email. “The rules are clear in that you can’t engage in misleading advertising, you can’t communicate falsely with your clients and you have to retain, supervise and have the ability to retrieve business communications.”

And in July 2011, the Canadian Securities Administrators (CSA) released a review of the way that portfolio managers use advertising and sales literature and correspondence, including those conducted through social media. At that point, industry use of social media was limited. Of the 56 portfolio management firms that were surveyed nationally, and 20 in Ontario specifically, very few were actively using social media in their daily practices, says Elizabeth King, manager, compliance and registrant regulation at the Ontario Securities Commission in Toronto.

CSA review

Added King: “We didn’t have an opportunity to really probe and look at how firms were ensuring compliance in this area because the firms we viewed were not themselves using social media websites to either market or interact with their customers.”

Although the CSA does not see many advisors using social media yet, the regulator realizes that it is only a matter of time before they do. As such, guidelines discussed in the notice are meant to act as a starting point for advisors, one that can be updated as they use social media more and more.

“We thought it was important to address this because we think it will be a future area of marketing and activity and also customer contact,” says King. “We wanted to alert our population of portfolio managers that we’re aware that they could be using social media websites to market their firms and services and we wanted them to be aware that we do expect them to comply with securities law and regulatory requirements in that context.”

Like IIROC, the CSA classifies communication through social media as advertising and sales literature and has established many of the same guidelines. Both IIROC and the CSA include all platforms of social media in the guidelines — from LinkedIn, Facebook and Twitter to YouTube, blogs and chat rooms. The Toronto-based Mutual Fund Dealers Association of Canada (MFDA) does not currently have any guidelines on social media.

Just as firms can use virtually any form of social media (as long as they are compliant), regulators leave firms with the responsibility of creating policies and procedures and only offer a few suggestions.

IIROC recommends that firms use one of three strategies to keep advisors compliant: pre-approval, post-use review and post-use sampling. Things such as templates, or pre-approved items, could be used in post-use sampling. Other items such as original materials, research reports and market letters all need pre-approval.

For the most part, dealer members currently using social media like the independence that regulators have granted to them in developing policies and procedures. Regulators have used the guidelines to expand on and provide further guidance on what was already in the rules, says Joseph Bajic, chief compliance officer and vice president, compliance with Assante Wealth Management (Canada) Ltd. in Toronto.

“There are certain core rules that have to be adhered to,” Bajic says, “but how we [follow] a rule — if it’s pre-approval, post-review — that would be up to us.”

However, while dealer firms can act independently by creating their own social media policies and procedures, regulators will monitor them to ensure that the firm remains compliant.

“When OSC compliance examiners go out to review a firm we would be actively looking at how supervision of the social media sites is being conducted,” says King, “and we would provide deficiency reports or commentary on that in a normal course.”

Failure to comply with rules established by provincial securities commissions and SROs can lead to a variety of different penalties depending on the severity of the infraction. IIROC lists possible penalties for failure to comply with securities law and regulations ranging from a fine of up to $1 million per contravention to a complete ban from working in the industry.

These guidelines however, remain a work in progress, as regulators will continue to examine how advisors and their firms use social media and the policies of other regulating bodies.

“We will be actively monitoring developments in this area, not just in terms of our compliance review process,” says King, “but also on the policy side, looking at guidance published by some of the other regulators where social media use is more prevalent.”

Source: Investment Executive

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