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Why Competent Selection of Outside Advertising Professionals is Critical to Ensuring Your Firms Compliance

SEC Charges Investment Advisers and Representatives for Violating the Testimonial Rule Using Social Media and the Internet
Wednesday, August 22, 2018

Submitted by: Brian Mills, Compliance Consultant, Red Oak Compliance Solutions

The Securities and Exchange Commission recently instituted five separate settled proceedings against two SEC-registered investment advisers, three investment adviser representatives, and a marketing consultant who committed and/or caused violations of the Testimonial Rule under the Investment Advisers Act of 1940 through their use of social media and the internet.

Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(1) states:

  1. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser registered or required to be registered under section 203 of the Act (15 U.S.C. 80b-3), directly or indirectly, to publish, circulate, or distribute any advertisement:
    1. 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.

Romano Brothers & Company, an Illinois corporation, created and showed a video of 27 clients stating they had profited from Romano Brother’s services. The video was later published to the firm’s public website and on Youtube.com. A shorter version of the video was then displayed on the firm’s public website and Youtube.com.

HBA Advisors, a California limited liability company, posted a link to its public website on Yelp.com and HBA investment advisor representatives posted ‘thank yous’ and claimed unfavorable reviews were false. In addition, HBA hired a marketing consultant who offered a service called, “Squeaky Clean Reputation,” whose purpose was to contact clients and request that clients post testimonials on Yelp.com. Testimonials included clients stating that HBA had helped them generate significant investment returns and HBA was trustworthy and had helped them increase the value of their investments.

Two additional investment advisor representatives from two different firms had similar relationships with the marketing consultant and the “Squeaky Clean Reputation’ service.

The SEC’s orders found that Romano Brothers and HBA violated Rule 206(4)-1(a)(1) and each was ordered to pay civil penalties of $15,000. The three investment adviser representatives were found to have caused violations of Rule 206(4)-1(a)(1), and each was ordered to pay civil penalties of $10,000. The marketing consultant was also found to have caused violations of Rule 206(4)-1(a)(1) and was ordered to pay civil penalties $35,000.

The actions of the firms, their representatives, and the marketing consultant highlight that advertising compliance is critical and that all parties need to be proactive. Simply hiring a marketing consultant with previous success without due diligence is a high-risk behavior in the securities industry. Outside professionals must be just as sensitive to industry regulations as industry professionals.

For a summary of the administrative proceedings and links to each order, click here.

Red Oak is here to help! Please contact us for assistance in ensuring your firm is in compliance with all relevant regulatory rules and laws.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.