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The Securities and Exchange Commission released on Monday long-awaited guidance clarifying advisors’ use of testimonials on social media.
The guidance update, issued by the agency’s Division of Investment Management in a Q&A format, addresses questions raised by advisors concerning the nature, scope and application of the rule that prohibits investment advisors from using testimonials in their advertisements.
The guidance, the IM division says, also addresses questions concerning investment advisors’ use of social media, specifically advisors’ use of social media and their publication of advertisements that feature public commentary about them that appears on independent, third-party social media sites.
The guidance seeks to assist firms in applying section 206(4) of the Investment Advisers Act of 1940 and rule 206(4)-1(a)(1) or the testimonial rule, to their use of social media.
The IM staff notes that consistent with previous staff guidance, in certain circumstances, “an investment advisor’s or investment advisory representative’s (IAR’s) publication of all of the testimonials about the investment advisor or IAR from an independent social media site on the investment advisor’s or IAR’s own social media site or website would not implicate the concern underlying the testimonial rule.”
Whether public commentary on a social media site is a testimonial depends upon all of the facts and circumstances relating to the statement, the IM staff says.
Also, while the term “testimonial” is not defined in the rule, the staff has consistently interpreted that term to include a “statement of a client’s experience with, or endorsement of, an investment advisor.” Depending on the facts and circumstances, the IM staff says, “public commentary made directly by a client about his or her own experience with, or endorsement of, an investment advisor or a statement made by a third party about a client’s experience with, or endorsement of, an investment advisor may be a testimonial.”
Coincidental to the IM update release, compliance consultant Nancy Lininger was fielding a question from an advisory firm client asking her whether posting a notice on the firm's website about the unexpected death of their founder and president would be "a prohibited testimonial."
Lininger writes in her March 31 ComplianceE-News that she contacted an SEC attorney who said that while he understood the need to make an announcement of the president's death on a public venue, both Lininger and the attorney surmised that "maybe" the advisory firm could "make an announcement on your web page to link to [an] outside web condolences book." However, Lininger said that linking to third-party websites "does not alleviate you of violating the testimonials rule. There is also the issue if the third-party website is truly independent and if you have the ability to affect which commentary is included or not or edit any of the remarks."
The SEC attorney, Lininger said, also thought that a "best practice is not to leave the remarks or third-party link up for the long term" and "suggested taking it down after even as short a period as 10 days."
Lininger said that after reading the IM guidance update, which she said appears to indicate that the SEC is "easing up on social media," she did get "some comfort in moving forward about [suggesting the advisory firm] link to a third-party online condolences book."
The IM staff did in the guidance, however, state that they “no longer take the position, as [they] did a number of years ago, that an advertisement that contains non-investment related commentary regarding an IAR, such as regarding an IAR’s religious affiliation or community service, may be deemed a testimonial violative of rule 206(4)-1(a)(1).”
One issue addressed by the guidance is commentary published on an independent social media site on which the advisor advertises. The advisor can use the comments, the SEC says, as long as it is clear to readers that the advisor's ad is separate from the commentary, and as long as the advisor's payment for the ad did not influence which comments were posted on, or excluded from, the site.
Check out SEC Ripped Over Analyses of Rules by Mercatus Study on ThinkAdvisor.