With advances in technology providing access to more information and opinion than ever before, investment advisers (IA) and investment advisory representatives (IAR) must be vigilant in how they use Social Media in their advertising and marketing. Social Media is often used to build relationships and more than ever to let people express their views and opinions. IA’s and IAR’s can easily run afoul of the Security and Exchange Commission’ (SEC) Testimonial Rule 206(4)-1(a)(1). Fortunately, the SEC’s Department of Investment Management issued guidance last year to help us better understand appropriate and inappropriate uses of Social Media.
Rule 206(4)-1(a)(1) states, “[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business . . . for any investment adviser registered or required to be registered under [the Advisers Act], directly or indirectly, to publish, circulate, or distribute any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.”
And while “testimonial” is not defined in the Rule, the SEC staff has consistently interpreted that term to include a “statement of a client’s experience with, or endorsement of, an investment adviser.” Between the Rule itself and the staffs’ interpretation of what a testimonial is, there has been limited ability to include comments by clients about their experience with an IA or IAR in advertising. Recent guidance does indicate that as long as certain conditions are met it may be possible.
Notable changes in the SEC’s position include:
- The publication of an article by an unbiased third party regarding the adviser’s investment performance unless that article includes a statement of a client’s experience with or endorsement of the adviser.
- An advertisement that contains non-investment related commentary regarding an IAR, such as regarding an IAR’s religious affiliation or community service.
When using third party commentary it is important to understand that it must be unbiased and independent of the IA or IAR. As long as the IA or IAR has no ability to affect the commentary or how the public commentary is presented on an independent social media site the testimonial prohibition may not be implicated. It is essential that ALL (unedited) public commentary is made available and updating of new commentary is on a real-time basis. If the IA or IAR drafts or submits commentary or if the IA or IAR has the ability to suppress some or all of a commentary, the testimonial rule would be implicated. Also prohibited would be an IA or IAR compensating a social media user for authoring the commentary.
When referencing commentary on independent Social Media sites in advertising, IA’s and IAR’s can direct the public by stating, “see us on [independent social media site]” to let clients/prospective clients know that they can research public commentary about the IA or IAR but they could not publish any testimonials from the independent Social Media site in their own advertising without implicating the testimonial rule.
For more information (including the use of client lists/photos and fan or community webpages) please see the SEC’s IM Guidance Update #2014-04: GUIDANCE ON THE TESTIMONIAL RULE AND SOCIAL MEDIA
Red Oak stands ready to assist IAs and IARs with all their social media questions.