Legal Considerations for Hedge Fund Managers that Use Social Media

In late 2010, the SEC sent a “sweep” letter (the “Sweep Letter”) to a number of registered investment advisers requesting information on their involvement with social media and related recordkeeping practices.  The Sweep Letter appears to signal heightened regulatory awareness that social media websites such as Facebook and LinkedIn are increasingly being used by investment advisers to connect with clients.  Use of these sites by hedge fund and other private fund advisers may present regulatory issues, however, under the advertising rules of the Investment Advisers Act of 1940 (the “Advisers Act”) and the exemptions for private placements under the Securities Act of 1933.  With the repeal of the private adviser exemption from Advisers Act registration still on track for July, social media compliance by advisers to hedge funds and private funds can present important compliance issues.  In a guest article, Diana E. McCarthy and Andrew E. Seaberg, Partner and Associate, respectively, at Drinker Biddle & Reath LLP, detail: the specific items requested in the Sweep Letter; existing regulatory guidance on social media use (including guidance with respect to testimonials and supervision); advertising issues raised by social media; how hedge fund managers can develop a robust social media policy; personal use of social media and related compliance policies; and business use of social media and related compliance policies.

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