As the popularity of social media spreads among financial advisors, the prospective benefits of communicating through these websites are being somewhat dampened by the opportunities that using social media also presents to investment fraudsters despite the efforts of North American regulators and compliance departments to head them off.
Recently, the U.S. Securities and Exchange Commission issued warnings regarding social media, recommending that firms put out separate policies on social media to distinguish it from other media and ensure there’s enough staff in place to pre-approve content efficiently and to archive and monitor all activity. For the investor, the SEC has listed red flags, including unsolicited sales pitches and signs of “affinity fraud” — scams targeting members of identifiable groups, such as religious or ethnic communities or the elderly.
These warnings were the result of the recent case involving Anthony Fields, an investment advisor in Lyons, Ill. The SEC alleges he used various social media websites, including LinkedIn, to sell fraudulent securities worth more than US$500 billion. The SEC also charged Fields with posting false information about his firm, Anthony Fields & Associates, while misrepresenting himself as an SEC-registered broker.
Although Fields’ alleged investment scheme drew potential buyers, money did not change hands. The SEC’s warnings to the public also include performing background checks on advisors before doing business.
Tom Hamza, president of the Toronto-based Investor Educa-tion Fund, believes fraudsters will take note of these publicly broadcasted warnings. “It’s very much like a home break and enter,” he says. “Anybody can break into your home. If you have a sign on your door saying a security company is monitoring it, the thieves will probably move into the next home. [The sign] doesn’t mean they can’t break into yours, but it does give them [reason for] pause.”
The Toronto-based Investment Industry Regulatory Organization of Canada has taken note of the SEC’s warnings. The impact of the Fields case doesn’t change IIROC’s recent guidelines on the use of social media. IIROC does have an umbrella policy that states that broker-dealers should not allow their advisors to use any communication channel if the firm does not have the capability to supervise activity. But the regulator also has laid out specific considerations on the use of social media. Says Lucy Becker, IIROC’s vice president of public affairs: “We would caution [that] it is generally not advisable to communicate with advisors through the use of social media unless a prior relationship has been established in person.”
That can be crucial when a potential client is meeting an advi-sor for the first time online. Becker agrees with the SEC’s warning to the public on researching an advisor’s or firm’s background, and points to the AdvisorReport, featured on IIROC’s website, which allows members of the public to search for advisors at IIROC-registered firms and view their qualifications.
Says Hamza: “The key issue that any fraudster has to address is credibility. Online, it is easy to establish that credibility, especially given how sophisticated and well organized fraudsters are.”
He is, however, pleased to see that many visitors to the IEF’s website access its tips on social-media communication: “That’s one of the fastest-growing areas of our website. The best thing is self-defence. People can be especially vulnerable if they don’t have that defensive and skeptical mindset.” IE