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SEC’s Division of Investment Management Issues Guidance Update on Advertisements and Social Media

March 26, 2013
On March 15, 2013, the Securities and Exchange Commission’s Division of Investment Management issued its first IM Guidance Update (the “Guidance Update”). According to the Commission’s press release, the Commission envisions a series of guidance updates that are designed to provide its views on emerging legal issues. The Commission states that “[t]he goal of the guidance is to increase transparency and enhance compliance with the federal securities laws and regulations.”

The inaugural Guidance Update concerns the obligations of mutual funds and other investment companies to file certain materials they post on “real time” social media. The staff notes that it has come to its attention that, in an abundance of caution, many mutual funds and other investment companies have been filing materials posted on their social media websites to ensure compliance with Section 24(b) of the Investment Company Act of 1940 (the “1940 Act”) or Rule 497 under the Securities Act of 1933 (the “1933 Act”),1 even when such filings were not required. According to the staff, mutual funds and other investment companies should consider the “content, context and presentation” of electronic communications when determining whether the filing requirements are triggered. In addition, consideration should be given to the other facts and circumstances such as whether the interactive communication is merely a response to a request or inquiry or forwarding previously filed content.

The staff provides specific, detailed examples of five kinds of interactive communications it believes need not be filed. These include communications containing

  • Only incidental mention of the name of a fund;
  • Incidental use of the word “performance;”
  • Factual introductory statements forwarding or including a hyperlink to a fund prospectus or to information filed pursuant to Section 24(b) or Rule 497;
  • An introductory statement not related to a discussion of the investment merits of a fund that includes a hyperlink to general financial and investment information; and
  • Responses to a social media user’s inquiry in which “discrete factual information” is conveyed and/or the provision of a hyperlink to sales literature for a fund.

For each category, there are specific examples that help clarify the filing requirements.

The Guidance Update also provides examples of communications that, in the staff’s view, would be subject to the filing requirements under Section 24(b) or Rule 497, even though they would otherwise be exempt from filing under FINRA Rule 2210. Such communications include those which discuss a fund’s specific performance or an issuer-initiated discussion of the investment merits of a fund.

Conclusion

The Division of Investment Management’s inaugural Guidance Update addresses an industry issue in a straightforward, user-friendly format. The guidance and illustrations should provide greater certainty for firms when deciding if content on a social media site needs to be filed.

Endnotes

1 Section 24(b) of the 1940 Act requires any advertisement, form letter, or other similar literature addressed to or intended to be distributed to potential investors to be filed with the SEC prior to its distribution. Similarly, Rule 497 requires that certain investment company advertisements and sales materials (“Rule 482 ads”) containing performance information also be filed with the SEC prior to circulation. In both cases, an advertisement filed with the Financial Industry Regulatory Authority (“FINRA”) pursuant to FINRA Rule 2210 satisfies the SEC’s Section 24(b) and Rule 482 filing requirements. FINRA Rule 2210 regulates broker-dealers’ communications with the public, including both written communication and public appearances and, among other things, requires broker-dealers to file with FINRA certain types of retail communications. Though retail communications subject to filing generally include advertisements and sales literature “concerning registered investment companies,” Rule 2210 expressly excepts from the filing requirements” any retail communication that is posted on an online interactive electronic forum.” However, in a 2010 interpretive release, FINRA stated that, even if interactive electronic communications are not required to be filed under its rule, the SEC could still conclude that such communications trigger its filing requirements under Section 24(b) of the 1940 Act and Rule 497 under the 1933 Act.

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