They may be a little late to the social media party but hedge funds and private equity firms are increasingly raising their profiles on LinkedIn, Twitter, Facebook and the like.
A recent study by marketing firm Agecroft Partners found that the use of social media within the hedge fund industry “has increased significantly” in recent years. Social media is “broadly used” both by investors to conduct due diligence on hedge funds as well as by the hedge funds themselves “to enhance their marketing strategy, investment research, and the overall quality of their firm,” the marketing firm said.
Agecroft Partners found that “by far and away” LinkedIn is the most widely used site by hedge fund employees, with 90% of funds with more than $100 million having some presence on the site. Twitter is a distant second.
Now the Securities and Exchange Commission is proposing new rules to require investment funds to provide more disclosure regarding their use of social media.
The SEC already scrutinizes the web sites of investment funds to make certain the information provided on the sites matches up with the actual products and services being offered. The new regulations would extend that same scrutiny to investment funds’ footprints on social media sites.
“Along with websites, advisers increasingly utilize social media to communicate and it would be useful for this information to be available to us and the general public,” the SEC’s proposal reads. “Our staff could use this information to help prepare for examinations of investment advisers and compare information that advisers disseminate across different social media platforms as well as identifying and monitoring new platforms.”
The proposed amendments to current disclosure regulations were published for public comment on May 20 and will remain so until mid-July. The SEC will then draft any additional changes before putting the proposal forward for final adoption, possibly in the fall.
Investment Advisers 'Being Flippant'
By now everyone knows that what they see on someone’s Facebook page doesn’t always represent the whole truth about that person. Similarly an investment fund – or, more likely, an outright scammer -- could potentially use the popular social media site to spread false information in an effort to attract investors.
Likewise, Twitter’s famous 140-character limit lends itself to witty exchanges between comedians, pundits, journalists and other clever entertainers, but not so much for investment advisors and the reams of risk disclosures they are required to provide to potential investors.
The SEC wants to ensure that investment advisers aren’t “being flippant with how they are marketing their products via social media,” said Michael Minces, a founding partner of Blue River Partners, a large compliance firm that helps hedge funds maneuver federal regulations.
In addition to noting that Twitter doesn’t provide enough space to include the requisite warnings and disclosures to potential investors – “A fund manager using Twitter to advertise a fund offering would be taking a very big risk,” he said -- Minces pointed out investment funds are prohibited from using client testimonials, a practice that works especially well on social media sites such as Facebook and Yelp.
“The SEC is trying to figure out how to regulate this, Minces said. The use of social media by investment funds is a relatively new phenomenon and the SEC is presumably concerned by the speed and breadth with which information moves in the social media realm.
“They’re new and their speed of use has just gone through the roof in recent years, as we know,” said Minces. “The SEC is concerned about the wrong kind of statement being disseminated too quickly.”
Minces sees the proposed regulations as a benefit overall to investors.
“It would be a bad trend for firms to start cutting back on disclosure and start using social media as a quicker way to solicit investors for their funds or services,” he said.