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Staying Compliant With the SEC’s Anti-Testimonial Rule

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As far as the SEC is concerned, no client has ever been happy, satisfied or remotely content with his or her investment advisor… ever. Even if through some intergalactic alignment a single client happened to appreciate what an investment advisor did to help her save and prepare for retirement, for example, nobody is allowed to know about it. It basically is the exact opposite of ‘See no evil, Hear no evil, Speak no evil.’ At least that is what the Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940 says (more or less). 

Every advisor knows the old adage that past performance does not guarantee future returns, and has been hardwired to disclose this in almost any discussion or presentation regarding investments. Past or present client experiences with the advisor, however, cannot be disclaimed away. Maybe the SEC doesn’t want investment advisors to get too full of themselves, who knows.

What we do know is that the ’40 Act fairly explicitly prohibits client testimonials of any kind: 

It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act for any investment adviser registered or required to be registered under section 203 of the 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. 

Curiously enough, perhaps the most important word in the entire rule (testimonial) has never been officially defined. According to the SEC’s recent Risk Alert on social media, however, “SEC staff consistently interprets [testimonial] to include a statement of a client’s experience with, or endorsement of, an investment adviser.” The SEC’s Division of Investment Management notes in its General Information on the Regulation of Investment Advisers that testimonials “include any statement of a client’s experience or endorsement.” Moreover, the SEC notes in its Risk Alert that the determination of whether a statement is a testimonial depends on “all the facts and circumstances.”

This is basically regulatory code for “we won’t give you enough specifics to make an informed decision regarding your business practices, but we’d be happy to let you know how you screwed it up during an enforcement action.” (Query, for example, whether this rule applies to non-clients, prospective clients that never became clients, or experiences not related to investment advice. Literal reading of the rule and subsequent guidance seems to suggest that testimonials from non-clients may be permissible, but testimonials from clients not related to investment performance seem to be a little less black and white.) 

The preliminary takeaway for advisors is simple: don’t use testimonials! Don’t hang posters of client quotes in your office, don’t describe any client experiences on your website, and don’t ask clients to speak about their experiences at any prospecting events. Think of it this way: you can’t display the equivalent of the “People love us on Yelp!” sticker anywhere. 

But once again, innovation and technology have thrown a wrench into the spokes of the regulatory framework. That’s right, I’m talking about social media (think Facebook, LinkedIn, Google+, or whatever some 19-year-old thinks up next).

A lot has been written about social media and the testimonial rule, so I’ll try not to regurgitate too much. What I will say is this: the SEC has only really said (again in its recent Risk Alert) that “‘social media plug-ins’ such as the “like” button could be a testimonial.” 

I have added emphasis to the word could intentionally to highlight that each determination will depend on the facts and circumstances. Advisors’ use of Facebook “likes,” LinkedIn “endorsements” or “recommendations,” Twitter’s “re-tweets,” or the “+1” button on Google+ could be considered testimonials. To say that a social media plug-in could be a testimonial by definition strongly suggests that a social media plug-in could not be considered a testimonial as well. But where does an advisor draw the line? 

Anecdotally, I’ve seen a lot of advisors outright prohibit the use of social media by their employees for business purposes. Others only permit employees to display their “business card” information as part of their social media profiles. Most seem to explicitly prohibit their employees from receiving “likes” on Facebook as well as “endorsements” and “recommendations” on LinkedIn, or at least hiding them after they are received.

Wherever your firm draws the line between permissible and impermissible use of social media by its employees, be sure to document it in your policies and procedures manual and keep it up to date as technology changes. After educating your employees about your policy, testing can be accomplished by receiving employee attestations, conducting spot audits of social media pages through public Google searches, and/or retaining an independent third-party to capture and store all social media content that is considered to be a record of the advisor. The least popular method seems to be requiring employees to “friend” or “link-in” to the Chief Compliance Officer or other compliance staff, but at least we in the compliance world don’t tend to post Instagrams of our lunch or the latest YouTube cat sensation.

For a technological how-to regarding LinkedIn endorsements, I’d recommend checking out Bill Winterberg’s video on his FP Pad website or reading an acute article by Michael Kitces’ guest blogger Amy Mcilwain. For a thoughtful alternative approach to social media in general, check out Michael Kitces’ own article here on ThinkAdvisor from early 2012. 

Investment advisors should not expect the prohibition on testimonials to go away anytime soon, so don’t let the regulators pick this low-hanging fruit during an exam. Keep your clients’ appreciation to yourself.


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