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.