News Highlight: SEC Issues New Guidance On Social Media And Testimonial Rule 206(4)-1

Posted by Michael Kitces on Tuesday, April 1st, 7:01 am, 2014 in News Highlights

As social media platforms continue to grow - and as is common, technological change outpaces regulators - the SEC has struggled (many suggest "lagged" might be more appropriate!) in its guidance regarding the advisor use of social media. While the core of the SEC's rules still ultimately boil down to: "Don't say anything on social media that would get you in trouble if you said it in any other public forum as well" the ambiguity regarding how these rules intersect with certain social media platforms has left many advisors (and their chief compliance officers!) confused and worried.

In a just-released update to its social media guidance, the SEC has provided some new rules and clarifications, especially regarding the potential use of third party "advisor review" sites, and also whether it's a testimonial violation to have (or participate in) a "community" or "fan" page, to have a public display of people you're connected to on social media channels (and whether it's an implied endorsement that you may be friends/followed by some of your clients), and whether it's permissible to direct clients to the advisor's social media pages to receive updates in the first place.

In general, the "new" rules are not surprising, follow a logical path to determining whether certain social media actions could constitute testimonials (e.g., the mere fact that clients happen to be connected/following/friending you is not deemed a testimonial), and unfortunately still do not address certain vagaries (e.g., are LinkedIn "endorsements" a violation of the testimonial rule or not?). Notably, though, the SEC's guidance was especially thorough regarding third-party "advisor review" sites and how such platforms can be administered safely without running afoul of the testimonial rules... in the process, potentially giving a green light to platforms ranging from Yelp to more advisor-specific review sites in the future! 

SEC Background

As the SEC explains in its new 2014-4 guidance, when it comes to social media for an RIA, the primary challenge is Rule 206(4)-1 of the Investment Advisers Act of 1940; the key provision, regarding permissible advertisements by investment advisers, states:

It 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 Investment Adviser 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.

In reviewing the history of this "anti-testimonial" rule (though the word "testimonial" is never defined), the SEC acknowledges that the fundamental issue was not necessarily the mere fact that a testimonial was being provided. The concern was that investment advisers would only share favorable testimonials in their advertising (and conceal any unfavorable comments), which "may give rise to a fraudulent or deceptive implication, or mistaken inference, that the experience of the person giving the testimonial is typical of the experience of [all of] the adviser's clients."

Notably, the word "testimonial" is not defined in the actual rule. The SEC's position has been that it includes a "statement of a client's experience with, or endorsement of, an investment adviser." However, the SEC has also acknowledged that an investment adviser's publication of an article by an unbiased third party regarding the adviser's investment performance is not a testimonial (as long as it doesn't include a statement of a client's experience with the advisor), and simply providing a partial client list that does no more than identify certain clients is not viewed as a testimonial either.

However, the SEC does note that, in a change from its prior position regarding "non-investment related commentary regarding an IAR", that an advertisement containing such commentary will no longer be deemed a testimonial. In other words, for commentary to even be potentially deemed a testimonial in the future, it must actually pertain to investment-related commentary, and outside commentary (the SEC's examples include religious affiliation or community service) would not be deemed a testimonial violation. However, it is still unclear with this guidance whether 'quasi-'related commentary, such as reviews of an advisor's non-investment financial planning services, could be deemed a testimonial.

Key Details From New SEC IM Guidance

The SEC's new guidance, which supplements previous guidance issued, including the National Examination Risk Alert on Investment Adviser Use of Social Media from January 4th of 2012, is delivered in a Question-and-Answer format, and appears to be focused primarily around "third party review sites" (e.g., Yelp), but includes details on directing prospects to social media pages, the use of community/fan pages, and more. Of course, these rules do nothing to change the ongoing requirement that investment advisers must have a process to archive and monitor social media use, and avoid saying things that are otherwise inappropriate (on social media or any other medium!).

Nonetheless, the new guidance covers new ground in several areas. Key details from the new guidance include:

Third Party Commentary (e.g., "review sites")

Publishing explicit or implicit statements of a client's experience on the investment adviser's own website, or an IAR's social media site, is still prohibited as a testimonial. However, when the IAR has no ability to affect which public commentary is included or how the public commentary is presented on an independent social media site; where the commentator's ability to include the public commentary is not restricted; and where the independent social media site allows for the viewing of all public commentary and updating of new commentary on a real-time basis, the concerns underlying the testimonial prohibition may not be implicated. 

On the other hand, the SEC also notes that this rule only applies as long as the investment adviser does not provide their own commentary to be included on the site, and cannot impact the way the results are viewed or the order in which they're listed (although if social media users can adjust how commentary is displayed and sort by their own criteria, that's permissible).

Michael's Note: This rule would appear to put advisors in the clear regarding third-party review sites, such as Yelp, presuming that the advisor really does not have any affiliation to the site, and cannot control the comments posted (e.g., by trying to delete negative comments while allowing positive ones to remain). In fact, the SEC guidance even acknowledges that an RIA can even publish the average score of its reviews from a third-party site (as long as the site otherwise meets the independence requirements)!

However, these rules also suggest that the advisor should not have any role in maintaining their "review page" on such sites, as adding their own commentary to the site which has reviews can cause them to be deemed testimonials, and even just being able to block, edit, or change the order of reviews can trigger the testimonial rule. It also implies that an RIA should be cautious about even directing clients towards or 'encouraging' (happy) clients to post reviews to the site, or the site may no longer be deemed to be "independent" of the advisor. On the other hand, as I've written in the past, as long as advisors cannot direct clients towards completing reviews on a third-party review site, there's serious doubt about whether any such platform will really be sustainable.

Referring To Social Media In Non-Social-Media Advertisements

Investment advisers who direct clients to their social media accounts will not be deemed to be soliciting testimonials from clients. For instance, the SEC states that "an investment adviser or IAR could reference the fact that public commentary regarding the investment adviser or IAR may be found on an independent social media site, and may include the logo of the independent social media site on its non-social media advertisements, without implicating the testimonial rule."

Michael's Note: In other words, it's acceptable to have advertisements that say "Check us out on [social media site]" and solicit prospective clients to follow the advisor there to receive whatever commentary the advisor subsequently publishes to those social media platforms (presuming the commentary itself is otherwise acceptable in the first place, of course!).

Client Lists [Revealed By Social Media]

Social media sites that include a listing of contact or 'friends' will generally not be considered a testimonial or endorsement of the advisor, especially if the contacts/friends are not otherwise grouped or listed in a manner that makes them identifiable as current or past clients of the advisor. However, if the investment adviser attempts to create the inference that these contacts/friends have experienced favorable results as clients, it may still be a violation of the testimonial rule (and generally, the SEC reserves the right to construe it as false or misleading advertising based on the facts and circumstances).

Michael's Note: These provisions should eliminate any concerns that the mere fact a client is "friended" on Facebook, "connected" on LinkedIn, or is a "follower" on Twitter, could be construed as a testimonial. As long as the advisor does not specifically do anything to indicate that these people are (happy/satisfied) clients, the mere fact that they are connected - presumably along with a number of colleagues, friends, and non-clients as well, will not trigger the testimonial rule. 

Fan/Community Pages

The third-party creation of a social media community or fan page where the public comments on investment topics, including potentially the services of the investment adviser, does not run afoul of the rules. However, if the investment adviser has a material connection to the fan/community page, and/or it is not deemed independent, comments there may be considered testimonials, especially if the investment advisor also drives traffic to such sites.

Michael's Note: The SEC's positioning here still raises serious concerns for advisors about the use of "fan pages" (e.g., on Facebook) or "community pages" (e.g., on LinkedIn). While the rules do not outright ban the use of such platforms, the SEC cautions strongly that such sites may be viewed as testimonials, and/or that the mere act of hyperlinking to those sites could be construed as implying testimonials. Ultimately, the determination of whether comments on the community/fan page were deemed testimonials would be up to the facts and circumstances of the content, but the SEC is certainly leaving the door open for community/fan pages controlled by advisors to be treated as a violation if content posted there by clients could be viewed as a testimonial.


So what do you think? Is the SEC's new guidance helpful to you? Will it impact your use of social media? What are the grey areas that you still wish the SEC would address as it pertains to social media?


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