FR04/2014 Report on the IOSCO Social Media and Automation of Advice Tools Surveys

1 | P a g e Report on the IOSCO Social Media and Automation of Advice Tools Surveys THE BOARD OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FR04/2014 J ul y 2014 2 | P a g e Copies of publications are available from: The International Organization of Securities Commissions website www.iosco.org © International Organization of Securities Commissions 2014. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. 3 | P a g e Report on the IOSCO Social Media and Automation of Advice Tools Surveys CHAPTER PAGE 1 Introduction 4 2 Background 6 3 Analysis of Intermediary Use of Social Media and Automated Advice Tools 9 4 Analysis of the Regulation and Oversight of Social Media and Automated Advice Tools 18 5 Conclusions 27 APPENDIX 1: Definition of Key Terms 29 APPENDIX 2: Tables 31 4 | P a g e Chapter 1 - Introduction IOSCO’s Committee on the Regulation of Market Intermediaries (C3) undertook a project to study the use of social media and automated advice tools in the capital markets by market intermediaries and how regulators are overseeing the use of these tools.1 C3 studied these issues because technology, and particularly the use of the Internet, is continuing to change the ways in which market intermediaries interact with both potential and existing customers. Among other things, social media2 provides a means to multiply the number of interactions between investors and market intermediaries, while at the same time, presents regulators with numerous challenges. Indeed, the growth and widespread use of social media for business communications, such as blogs and social networking sites, has impacted how market intermediaries interact with investors. As a result, the use of social media may affect how regulators oversee market intermediaries that use these evolving mediums as well as the tools they use to approach social media-related regulatory issues. From an intermediary’s perspective, providing customers advice through an automated means presents an opportunity to formulate and deliver advice in a cost effective way. At the same time, however, use of automated tools presents numerous challenges to regulators. Market intermediaries have used some form of automated tools in the provision of advice for more than a decade. Use of these types of tools is, however, expanding as intermediaries seek to provide advice in a more efficient and cost effective manner. In addition, consumers, whether by choice or because they cannot afford (or do not wish to pay for) the traditional advisory services of an intermediary, at times choose to manage their own portfolios directly using online tools. As regulation has evolved, and the use of Internet-based technology has advanced, so too has the sophistication and range of functionalities and analytics that social media and automated advice tools provide. In addition, the complexity of financial products has increased making some products more difficult for investors to understand. 1 The term “intermediaries” should generally be understood as defined in the IOSCO core principles. As stated in the IOSCO Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (Oct. 2011), “Market intermediaries generally include those who are in the business of managing individual portfolios, executing orders and dealing in, or distributing, securities." According to the methodology, a jurisdiction may also choose to regulate as a market intermediary an entity that simply provides advice regarding the value of securities or the advisability of investing in, purchasing or selling securities as well as an entity that engages in proprietary trading, securities underwriting or the placing of financial instruments without a firm commitment basis. When we use the term intermediaries in this proposed mandate, we intend to include representatives of the entity. Notwithstanding the above, for purposes of this report, the term intermediary in the U.S. securities sector refers to registered broker-dealers, not investment advisers. Also, in the course of this report the terms intermediaries and firms are used interchangeably. 2 As the staff of th