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On March 31, the Securities and Exchange Commission's Division of Investment Management released a guidance update regarding the testimonial rule and third-party social media sites. The release addressed the application of Section 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule 206(4)-1(a)(1) thereunder (Testimonial Rule) on the use of social media.
The Testimonial Rule reads as follows:
It shall constitute a fraudulent, deceptive or manipulative act, practice or course of business […] for any investment advisor registered or required to be registered under [the Advisers 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 advisor or concerning any advice, analysis, report or other service rendered by such investment advisor.
Although the term “testimonial” is not defined in Rule 206(4)-1, the SEC has consistently interpreted the term to include a statement of a client's experience with or endorsement of an advisor. The SEC has also taken the position, however, that an article by an unbiased third party concerning an advisor's performance is not a testimonial unless it includes a statement of a client's experience with or endorsement of the advisor.
It is important to understand exactly what the guidance update has and has not changed. An investment advisor (RIA) or representative (IAR) still cannot post public commentary that explicitly or implicitly states a client's experience or endorsement on their website or social media site. Simply put, neither the RIA nor its IARs may invite clients to post public comments on the RIA's own website, blog or social media site that advertises the RIA's services. Therefore, the RIA still may not post any content on Twitter or Facebook inviting a client to share their experience about the RIA or IAR. This will likely result in a deficiency letter or enforcement matter.
However, the guidance update has changed the status quo with respect to the use of testimonials appearing on independent sites. The new guidance suggests that an RIA or IAR will not face enforcement action for public comments appearing on third-party, independent social media sites, so long as:
The RIA or IAR has no ability to affect which public commentary is included or how it is presented.
The social media site allows for the viewing of all public commentary and updating of new commentary on a real-time basis.
The SEC takes the position that RIAs may use the content on unaffiliated social media sites such as Yelp in future print or electronic media advertisements. However, three requirements must be met prior to using these reviews:
The social media site must provide content that is independent of the RIA or IAR.
There can be no material connection between the independent social media site and the RIA or IAR that would call into question the independence of the site or commentary.
The RIA or IAR must publish all of the unedited comments regarding the RIA or IAR appearing on the independent social media site.
RIAs or IARs can lose this safe harbor by submitting commentary of their own that is included on the independent social media site, or if the IAR is allowed to suppress the publication of all or a portion of the commentary, can edit the commentary or is able to organize or prioritize the order in which the commentary is presented. In addition, the RIA would lose the safe harbor if it directs supervised persons to post on the site or if it compensates clients or potential clients to post content on the site.
Also notable in the release, the SEC issued guidance on fan or community pages created by unrelated parties. However, the guidance does not offer any sort of relief as to self-created Facebook, LinkedIn or Twitter accounts. Therefore, any posting by an advisor or client on these sites with respect to the performance or services of the RIA would still be considered a testimonial.
As was previously the case, all advertisements must comply with Rule 206(4)-1(a)(5), which prohibits any false or misleading advertisement.