SEC Approves Limited Use of Social Media Testimony

The Securities and Exchange Commission (SEC) released guidance aiming to clarify how the testimonial rule barring certain marketing practices under the Investment Advisers Act applies to social media.

The guidance, presented in question and answer format with a  short preamble, 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—including registered investment advisers (RIAs) and others in the financial services space.

The guidance suggests the SEC largely sees it as a positive that consumers are gaining a stronger ability to conduct additional due diligence on current or prospective service providers by connecting with other clients via social media websites. But as the use of social media increases, the SEC is also hoping to cut off any inappropriate or misleading use of social media commentary or reviews by advisory firms.

The guidance specifically addresses section 206(4) of the Investment Advisers Act of 1940 (known as the “Advisers Act”) and rule 206(4)-(a)(1) thereunder regarding the use of client testimonials in marketing materials. In basic terms, the SEC says it believes, consistent with previous staff guidance, that in certain circumstances an investment adviser’s publication of all of the testimonials about the investment adviser coming from an independent social media site on the investment adviser’s own social media site or practice website would not implicate the concern underlying the testimonial rule.

In other words, the SEC does not necessarily have a problem with advisers promoting their presence on social media when the adviser has no ability to affect which public commentary is included or how the public commentary is presented on the independent social media site. It is also important in the eyes of the SEC that the independent social media site allows for the viewing of all public commentary, both positive and negative, and updating of new commentary on a real-time basis, with little restriction.

Additionally, the SEC reminds advisers they cannot actively suppress negative reviews or testimonials in favor of positive feedback or otherwise aggressively circulate favorable social media testimony.

The SEC feels this attitude is consistent with the spirit of the testimonial rules, which stipulate that it constitutes a fraudulent or manipulative act “for any investment adviser registered under the Advisers Act to publish or circulate any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis or report rendered by such investment adviser.”  

The strict nature of that language led many advisers to feel as if any use or promotion of social media content could constitute fraudulent or manipulative marketing practices under the Advisers Act. But that’s not true in every case, the SEC says. The guidance is clear that the SEC is still wary of the aggressive use of client testimonials, pointing out that “by their very nature [testimonials] emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable.” But the rule shouldn’t preclude advisers outright from using social media to connect with clients, the SEC argues, or even to connect clients with one another.

The SEC says it is also still concerned that testimonials tend to give rise to a fraudulent or deceptive implication that the experience of the person giving the testimonial is typical of the experience of the adviser’s clients. So even when an adviser has no control over independent social media content, concerns may still exist.

The guidance provides additional insight about what types of social media content can represent a testimonial. The guidance explains whether public commentary on a social media site is truly a testimonial “depends upon all the facts and circumstances relating to the statement.” The guidance doesn’t provide a precise definition or list of criteria, but instead broadly describes a testimonial as any “statement of a client’s experience with, or endorsement of, an investment adviser.”

Under this definition, the SEC acknowledges that public commentary made directly by a client about his own experience with, or endorsement of, an investment adviser may or may not be a testimonial. What appears to matter most to the SEC is how that commentary is developed and whether it is influenced by the adviser.

The SEC also reaffirms that an investment adviser’s publication of an article by an unbiased third party regarding the adviser’s investment performance is not a testimonial, unless it includes a statement of a client’s experience with or endorsement of the adviser.

The only break from precedent covered in the guidance involves advertisements that contain non-investment related commentary about an advisory business. The SEC says it “no longer takes the position, as it did a number of years ago, that an advertisement that contains non-investment related commentary .. such as regarding religious affiliation or community service, may be deemed a testimonial violation of rule 206(4)-1(a)(1).”