As social media rises in popularity, much of Wall Street, including hedge funds and registered investment advisors (RIAs), is turning to Twitter, Facebook and other social networks to share information. Unfortunately most people view social media as very casual in nature, but regulators don’t see it that way, particularly when important disclosures are posted and shared on social platforms.

SEC May Start Monitoring Hedge Funds' Social Media Activity

Now the Securities and Exchange Commission is proposing new rules that could change the way RIAs, private-equity firms and hedge funds use social media.

SEC strives for transparency in hedge funds’ use of social media

The goal of the proposed rule change is to require RIAs to disclose details about their business social media accounts and how they use them. Included in the proposal is the requirement for RIAs to keep tabs on the social media accounts of their employees as well.

Needless to say, this will significantly increase hedge funds’ and private-equity firms’ costs. It’s worth questioning whether it’s even possible for firms to sufficiently track their employees’ social media accounts, and the SEC is aware of this difficulty.

Regulators are seeking public comments on the proposed rules. If they do end up deciding that firms must keep tabs on what their employees post on social media, then these firms will have to figure out how to do it.

Why the SEC wants to track Hedge Funds on social media

The rise in the popularity of social media has led the SEC to question the types of information that are being disseminated through social media. Regulators want to force hedge funds and other RIAs to disclose all the social media channels they use so that they can more closely scrutinize statements made over those accounts.

They also want to make it clear that hedge funds and other RIAs must be careful what they post on their Facebook or Twitter accounts.

“The major misconception is that statements made through social media are informal,” Blue River Partners founding partner Michael Minces told Value Walk. Blue River is one of the biggest compliance firms in the country.

“Such statements are subject to the same disclosure and marketing rules applicable to traditional advertising by RIAs, and many managers miss that point,” Minces added. “The SEC has been highly focused on this disconnect by the RIA community over the past few years and social media has continued to be increasingly utilized.”

Some hedge funds are exempt

Minces said it’s important to understand that the proposed rules apply only to RIAs, so hedge funds that are not registered with the SEC as investment advisors. Also hedge fund managers who are registered with agencies other than the SEC, like the Commodity Futures Trading Commission, wouldn’t have to comply with the proposed rules.

However, he also said he wouldn’t be surprised if regulators add firms registered with other agencies to the disclosure requirements down the road if they end up being enacted. Any firms found not to be complying with the social media disclosure requirements (if enacted) could face fines or other penalties.

“The broader point here is that the SEC is highly focused on the types of communications that are being made in these very public media channels and, based on the nature of such communications by regulated entities like RIAs, such statements could create regulatory enforcement issues for managers,” said Minces.

He warned that even investment advisors that are exempt from the regulations still face some regulation by the SEC.

“To the extent that the SEC will be focusing specifically on social media, exempt advisers can still encounter regulatory enforcement issues relating to statements made in these forums to the extent that such statements rise to the level of perceived fraud or misrepresentation, or in the event that investors complain directly to the SEC about a specific exempt manager,” he said.