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Red Oak Blog

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Tuesday, May 27 2014

Updated SEC Guidance on Testimonial Rule and Social Media

The Security and Exchange Commission (SEC) recently issued an update regarding “Guidance on the Testimonial Rule and Social Media”. This Guidance discusses how financial advisers may use testimonials on social media sites without violating the Investment Advisers Act of 1940 (“Act”). The Act prohibits testimonials, since by their very nature they emphasize the comments that are favorable to the investment adviser and ignore those which are unfavorable (Rule 206(4)-1).

In today’s electronic world, people expect to be able to read reviews before they buy a product or use a service. But there are no reviews for financial advisers. This Guidance may help clients to find objective information regarding financial advisers.

The SEC Guidance attempts to address some of the questions that firms and advisers have been asking. It states that under certain circumstances, financial advisers may now accept “testimonials” on social media sites, however the testimonials must be completely independent and have no “material connection” to the financial advisers or investment advisory representatives (IARs).

The guidance includes:

  • No explicit client experiences on financial advisers’ personal social media sites
  • No posts from other social media sites unless the public has equal access to all the commentary available and the commentary is from an independent source
  • No adviser or firm authored or edited testimonials
  • No compensation for testimonials
  • No highlighting favorable or removing unfavorable testimonials

If firms do decide to allow Recommendations, they will need to update their existing social media polices with enough detail so that financial advisers understand that they must remain independent of the creation and editing of testimonials. Editing recommendations or making suggestions of content is prohibited. Firms will also need to put plans in place for how to handle the negative commentary that is bound to come.

Please click here to read the full guidance.