According to a story in Investment
News, the Securities and Exchange Commission began a sweep of
investment advisers' use of social media and social networking last month.
The story has a quote from Doug Flynn, an adviser at
Flynn Zito Capital Management LLC, that is exactly on target for traditional
"I'd love to start tweeting to the general public once
they can clearly tell me what I can and can't do. However, putting yourself out
there too much without specific guidelines is just not worth the risk."
I don't think the same is true for private fund managers
who will soon have to register with SEC as investment advisers. How does the
SEC's regulation of Web 2.0 affect private fund managers once they register as
Private funds are limited by the prohibition on general
solicitation and advertisement. They usually rely on Regulation D to keep
from having to register the interests in their funds. Rule 502(c) of
Regulation D states that "neither the issuer nor any person acting on its
behalf shall offer or sell the securities by any form of general solicitation
or general advertising, including, but not limited to, the following:
1. Any advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio; and
2. Any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising. . . "
The very public nature of social media and social
networking sites are going to put them squarely in the box limited by this
regulation. Even though there is some ability for a fund manager to use social
media under the Investment Advisers Act, that ability is curtailed by the
limitations under the Securities Act. Certainly, fund managers and their
personnel can use web 2.0 tools for personal reasons and business reasons not
related to advertising their firm or its funds. (You will notice that I don't
publish posts about my firm or its funds.)
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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