Hedge funds warned over interacting with investors via social media

Date: Friday, May 27, 2011
Author: Charles Gubert, COO Connect

Hedge funds that utilise social media such as Linkedin, Twitter and Facebook to interact with investors must ensure their staff are fully compliant when using these digital communications platforms.

Hedge funds that utilise social media such as Linkedin, Twitter and Facebook to interact with investors must ensure their staff are fully compliant when using these digital communications platforms.

The US Securities and Exchange Commission (SEC) currently does not have codified rules governing the use of social networking sites specifically for hedge funds. However, in January 2011, the SEC sent a letter to investment advisers demanding they disclose how they use various social media in their businesses. It is possible that hedge funds could find themselves ensnared in future regulation aimed at social media. In 1999, FINRA stated that communicating with investors via Internet chat rooms was no different from making a presentation to those investors in person.

Suman Garhwal, vice president of business integration for the Protegent division at technology provider Sungard, highlighted managers need to be very careful about how they use social media with investors, particularly given the stringent rules about marketing alternative investment products. “They cannot advertise to investors who they do not have a relationship with. Hedge funds need to have a well-defined social media policy and best practice guidelines that they should provide to managers. Training would also be a good route to take. Hedge funds might need to have surveillance of such social media sites to ensure compliance. Using social media like Linkedin and Twitter to network and educate is absolutely fine. However, if a fund manager uses social media to advertise the performance of the fund, for example, that could be a problem,” she said.

Nevertheless, there are some shades of grey when it comes down to social media. James Cella of SiteQuest Technologies – partner of SunGard, stressed that managers must understand the boundaries. “Should a manager be communicating with their golf buddy who is also an investor through Facebook? I think compliance teams are going to want to keep such communications limited to emails,” he said.

Compliance teams might opt for technology that can monitor social networks. This is something that SunGard incidentally offers to its clients although there are question marks as to whether hedge fund employees would want their employers to rout through their personal correspondence on social networking sites. However, Cella acknowledged that Sungard’s technology does enable employers to distinguish between personal and business content on social media sites.

“There are privacy issues nevertheless,” acknowledged Cella. “But these are more prevalent in the UK and European Union rather than the US. Many people feel that if you share information with 200 friends on Facebook, that information is hardly private anymore. Furthermore, our social media surveillance technology captures key words that might raise compliance issues,” he added.

Social networking sites have come under the spotlight recently following the bad press some hedge funds have received over the last year. Raj Rajaratnam, the founder of the $3 billion Galleon Group hedge fund was found guilty on 14 counts of conspiracy and securities fraud charges earlier in May. There have been a series of clampdowns by the SEC on expert networks – firms that match industry specialists including those working in public companies with managers. For a fee, managers can gain cutting edge information and analysis from these expert networks. Given the spotlight hedge funds are under, it is very possible that managers interacting with investors via social media could fall foul of the regulators.

The US Securities and Exchange Commission (SEC) currently does not have codified rules governing the use of social networking sites specifically for hedge funds. However, in January 2011, the SEC sent a letter to investment advisers demanding they disclose how they use various social media in their businesses. It is possible that hedge funds could find themselves ensnared in future regulation aimed at social media. In 1999, FINRA stated that communicating with investors via Internet chat rooms was no different from making a presentation to those investors in person.

Suman Garhwal, vice president of business integration for the Protegent division at technology provider Sungard, highlighted managers need to be very careful about how they use social media with investors, particularly given the stringent rules about marketing alternative investment products. “They cannot advertise to investors who they do not have a relationship with. Hedge funds need to have a well-defined social media policy and best practice guidelines that they should provide to managers. Training would also be a good route to take. Hedge funds might need to have surveillance of such social media sites to ensure compliance. Using social media like Linkedin and Twitter to network and educate is absolutely fine. However, if a fund manager uses social media to advertise the performance of the fund, for example, that could be a problem,” she said.

Nevertheless, there are some shades of grey when it comes down to social media. James Cella of SiteQuest Technologies – partner of SunGard, stressed that managers must understand the boundaries. “Should a manager be communicating with their golf buddy who is also an investor through Facebook? I think compliance teams are going to want to keep such communications limited to emails,” he said.

Compliance teams might opt for technology that can monitor social networks. This is something that SunGard incidentally offers to its clients although there are question marks as to whether hedge fund employees would want their employers to rout through their personal correspondence on social networking sites. However, Cella acknowledged that Sungard’s technology does enable employers to distinguish between personal and business content on social media sites.

“There are privacy issues nevertheless,” acknowledged Cella. “But these are more prevalent in the UK and European Union rather than the US. Many people feel that if you share information with 200 friends on Facebook, that information is hardly private anymore. Furthermore, our social media surveillance technology captures key words that might raise compliance issues,” he added.

Social networking sites have come under the spotlight recently following the bad press some hedge funds have received over the last year. Raj Rajaratnam, the founder of the $3 billion Galleon Group hedge fund was found guilty on 14 counts of conspiracy and securities fraud charges earlier in May. There have been a series of clampdowns by the SEC on expert networks – firms that match industry specialists including those working in public companies with managers. For a fee, managers can gain cutting edge information and analysis from these expert networks. Given the spotlight hedge funds are under, it is very possible that managers interacting with investors via social media could fall foul of the regulators.