Compliance staff from Dechert’s Financial Services Group say they are happy the SEC addressed investment adviser use of social media content, especially client testimonials, in a guidance update published in early April. In the update, the SEC’s Division of Investment Management maps out its position on when registered investment advisers (RIAs) may use reviews available on independent social media sites without violating testimonial rules under the Investment Advisers Act of 1940 (see “SEC Approves Limited Use of Social Media Testimonials”).
The guidance argues the SEC is sensitive to the fact that widening use of social media has dramatically increased consumer demand for independent, third-party commentary and reviews of many different types of service providers. Consistent with earlier guidance, the SEC says it is therefore okay for advisers to reference or republish social media content that reflects positive client experiences, so long as the testimonials come from an independent social media site and the adviser cannot control or filter the content to suppress negative feedback or otherwise mislead clients.
Dechert supports this position, the firm says, but it argues SEC officials only considered a narrow set of circumstances in the latest guidance update, leaving open a number of significant questions about the application of the testimonial rule to common uses of social media—especially when advisers themselves participate on social media sites or pay them for advertising space. Dechert experts explain ambiguity also comes from the SEC’s suggestion that the concerns of publishing testimonials on traditional media may not be present in social media, because social media allows for instantaneous updating of posted commentary and concurrent viewing of all of the comment history.
The statement of this principle by the SEC, according to the Dechert analysis, seems to suggest advisers are free to use social media commentary so long as they are not filtering the content or otherwise restricting access to negative reviews, and accordingly the SEC's guidance update indicates that an investment adviser may publish on its own social media page commentary from an independent social media site if certain conditions are met. However, Dechert argues the SEC has not gone far enough in explaining these conditions, which are as follows:
- Independence — Commentary from an independent social media site must be generated by commentators who are independent of the investment adviser. The guidance update indicates, as an example, that an investment adviser who directed its employees to write reviews about the investment adviser on an independent social media site, and then proceeded to use those testimonials in advertisements, would violate the testimonial rule. The guidance is less clear about cases in which a firm or its staff participates on a social media site but does not actively solicit endorsements on the platform. Is this advisory firm still independent of the social media site?
- No Material Connection — There must be no “material connection” between the independent social media site and the investment adviser that would call into question the independence of that social media site or commentary. As Dechert explains, the SEC's guidance update states that a material connection between an investment adviser and an independent social media site could also exist if, for example, the investment adviser compensated a social media user (including with the offer of any product, free service or discount) for writing a review. What remains less clear cut, Dechert argues, is whether adviser advertisements appearing on an independent social media site would necessarily impeach such a site’s independence or establish a material connection, especially in cases where it could be challenging for the reader to distinguish between user-generated and adviser-generated content.
- Completeness — The investment adviser must make available all of the commentary found on the independent social media site concerning the investment adviser, without any edits. The SEC's guidance is clear that an investment adviser may not arrange the commentary in a manner that emphasizes favorable reviews while de-emphasizing negative reviews, Dechert explains, but this is an area where technological constraints may limit the practical usefulness of the SEC's guidance. For example, unless an investment adviser has the capability to enable real-time updates on its own site as new comments are posted on independent social media sites, the adviser would be limited to posting links on its own social media site to the sites on which the commentary is posted. It's unclear, Dechert argues, whether such a manual process would satisfy the standard of completeness the SEC says it expects.
Further, the SEC staff states that investment advisers may publish testimonials that include a mathematical average of social media commentary, so long as such ratings are not based on a system designed to elicit pre-determined results favorable to the investment adviser, Dechert explains. However, the guidance update is silent as to whether investment advisers may provide only the mathematical average rating without providing the content of the commentary itself.
All of this leads Dechert experts to conclude the SEC's statement that an investment adviser’s publication on its own social media site of all of the commentary available on an independent social media site would not violate the testimonial rule, upon further analysis, is not robust enough to truly expand real advisers opportunities to utilize social media as a means of advertisement.
The criteria the SEC staff sets forth only provide limited guidance on applying the testimonial rule in the context of social media advertising, Dechert argues, so a broader interpretation of the testimonial rule will be required to permit investment advisers to utilize social media meaningfully as part of their marketing programs.