Social Media in Finance: Opportunity or Danger?

According to Pew Research, 70 percent of Americans currently use social media, while only 5 percent used social media in 2005. This increase has been steady and drastic, leading to controversy surrounding the usage of social media by businesses in regulated industries and the prevalence of data collection by government agencies.

The social media landscape has been impacted by vast, grey areas concerning legal and ethical issues. Some agencies, such as the Internal Revenue Service (IRS), are keen to take advantage of the opportunities presented by social media, whereas other entities across regulated industries are more skeptical. Social media presents both apparent danger and potential undiscovered opportunity, forming a fascinating and nuanced topic for discussion.

To learn more, check out the infographic below created by Washington State University’s online Master of Business Administration degree program. Research conducted by WSU faculty members Kimberly A. Houser, Debra Sanders and Robert E. Crossler is also cited within the infographic.

Social Media Usage by Businesses in Regulated Industries

Businesses within the finance industry have taken an inordinate amount of time to adapt social media into their marketing strategies, partially due to fears concentrated around ensuring legal compliance. However, consumers of financial services are interested in testing engagement on social media.

High-net-worth adults use social media at a higher rate than the general population. Over 33 percent of adults have asked investment firms and financial advisors questions about information they’ve found while using social media. And 70 percent of wealthy investors have either relocated investments or changed their relationship with a financial investor because of something they’ve seen on social media.

Social media usage can benefit financial disclosures in numerous ways. Management is able to manipulate the three-way communication channel through company communications in the form of posts or tweets, individual investor comments communicated to the company, and investor comments communicated to other investors. If comments attached to posts on social media are positive, then the swift dissemination of financial information on social media may even positively affect stock price.

However, social media usage can also negatively affect financial disclosures. Social media could impact perceptions of management’s credibility, which was perceived to be higher when positive comments were attached to disclosures of bad news than when negative comments were attached. And while management was considered more credible when disclosing good news, bad news tends to elicit stronger reactions than good news.

Businesses and professionals within the finance industry can help ensure that their social media usage is legally compliant by following these suggested guidelines:

1. Businesses should establish roles and identify individuals with the authority to speak for them on social media. They should also implement processes to review profiles on LinkedIn and other social media platforms before using them to conduct business.
2. Investment advisors should not “cherry pick” testimonials and should not be involved in creating them. They should also avoid using “buy,” “sell,” “hold” and other pitch words on social media.
3. Member firms must establish Written Supervisory Procedures (WSPs) and archive electronic communications to avoid being fined by the Financial Industry Regulatory Authority (FINRA).

How the IRS Is Using Taxpayer Social Media Data

According to a study conducted by WSU faculty members Kimberly A. Houser and Debra Sanders, “The IRS uses big data analytics to mine commercial and public data pools including social media sites (e.g., Facebook, Instagram and Twitter). This data is then added to its proprietary databases, and pattern recognition algorithms are run to identify potential noncompliant taxpayers.”

The IRS also owns cell phone tracking technology with the ability to record phone conversations, text messages and the location of whomever is using the cell phone. The IRS has the ability to access private emails as well. However, the IRS viewing private electronic communication is a violation of the Fifth Amendment, which states that it is an individual’s right to not produce private papers that may be potentially self-incriminating.

IRS data collection could cause potential issues, such as failure to comply with Fair Information Practices (FIPs), which cover the following notice-and-consent requirements:

1. No secret data collection systems as taxpayers have not been given adequate notice about IRS social media data-mining efforts.
2. Data collection should occur for a specific purpose, with user permission being required for other purposes. Previously, damning information has been discovered through IRS data mining on Facebook. But this is a violation of the FIP consent requirement if the IRS is searching for potential noncompliant activity without taxpayer consent.
3. A lack of transparency could violate the Administrative Procedure Act (APA). If the IRS refuses to disclose how the DIF algorithm is structured, it could violate transparency requirements in several laws, including the Freedom of Information Act (FOIA), the Privacy Act of 1974, the E-Government Act and the Federal Agency Data-Mining Reporting Act, among others.

As oversharing becomes more prevalent, the IRS has begun checking social media accounts when running audits. Taxpayers should be aware that deductions claimed on their tax returns should line up with the lifestyles they depict on social media.

Social media is a largely uncharted territory with the potential to be both daunting and appealing. By taking courses on the rapidly evolving legal environment surrounding businesses and their use of social media, WSU online MBA students can develop their awareness of the professional role businesses play in complying with existing laws and regulations.