The staff of the SEC’s Division of Investment Management has provided guidance for investment advisers regarding the use of social media and public commentary and the potential for inappropriate use of testimonials. The guidance provides examples and answers questions concerning the nature, scope, and application of the rule that prohibits advisers or investment advisory representatives from using testimonials in their advertisements and the use of public commentary presented on an independent social-media website. The guidance is designed to assist investment advisers in developing compliance policies and procedures to address participation in evolving technologies and cautions advisers to carefully consider how information is displayed to avoid violations of the testimonial rule and to present information in a manner that does not render advertisements false or misleading.
Testimonial rule. Advisers Act Rule 206(4)-1(a)(1) prohibits a registered adviser from publishing or distributing any advertisement referring to any testimonial concerning the adviser or its activities. Whether public commentary on a social media website is a testimonial depends upon the facts and circumstances relating to the statement, but the term generally includes “statement[s] of a client’s experience with, or endorsement of, an investment adviser,” the staff explained.
However, recognizing consumer demand for information about service providers from independent parties, the staff has provided provides specific advice to advisers on how to use social media and publish advertisements featuring genuine third-party commentary from independent sources that could be useful to investors. The staff noted that it continues to be of the opinion that publication of all of the testimonials about an adviser or representative from an independent website would not implicate the concerns underlying the testimonial rule. Further, according to the guidance, an adviser’s publication of an article by an unbiased third party regarding its investment performance or a partial client list, which does no more than identify certain clients, does not a constitute testimonial, unless the publication includes a statement of client experience or endorsement. However, the staff cautioned, these publications could violate the federal securities laws if advertisements are false or misleading.
Third-party commentary. The staff explained that publishing public commentary that includes a statement of a client’s experience with or endorsement of an adviser or representative on the adviser or representative’s social media website would involve a prohibited testimonial. It also would not be permissible to invite clients to post commentary directly on the adviser’s website or social media website, the staff stated. However, the staff noted, the testimonial prohibition may not be implicated when: (1) an adviser or representative has no ability to affect the public commentary included (or its display) on an independent social media website; (2) commenters’ abilities to include public commentary is not restricted; and (3) the independent website allows for the viewing of all public commentary. Publication from an independent social media website would not raise any of the dangers that the testimonial rule was designed to prevent, if the website were truly independent of the adviser or representative and the adviser or representative publishes all of the unedited comments appearing on the independent social media website, according to the guidance. The staff clarified, however, that commentary would not be independent if the adviser or representative directly or indirectly authored or compensated the author of the commentary on the independent social media website or if it or prioritized or edited the commentary. An adviser or representative may only publish testimonials from an independent social media website in a content-neutral manner, presenting positive and negative commentary with equal prominence, but may provide users with sorting ability, the staff explained.
Advertisements. An adviser’s advertisement within an independent website that also contains independent public commentary does not necessarily create a prohibited testimonial or make the advertisement false or misleading, according to the staff. However, in order to avoid prohibited activities, the adviser must be able to demonstrate independence, and advertising revenue may not affect what public commentary is included. Further, it must be readily apparent that the advertisement is separate from the commentary, the staff explained.
The staff also stated that an adviser or representative may reference the fact that public commentary may be found on an independent social media website in an advertisement, but cannot publish any of the testimonials, without implicating the testimonial rule.
Client lists and fan pages. The staff also recognized the common use of communal listings of contacts on social media websites and likened the lists to the long-accepted partial client lists not subject to the testimonial rule. So long as the contacts are not grouped or identified as current or past clients, displays of contact lists will not violate any prohibitions, according to the guidance. However, the staff cautioned, if advisers or representatives create an inference that the contacts have had favorable experiences with their advisory services, the advertisements could be considered to be in violation of Rule 206(4)-1.
The staff also explained that a third party’s operation of community or fan webpages generally would not implicate the rule, but explained that advisers should be wary of driving user traffic to such websites, especially with hyperlinks. The advertising prohibitions may apply to these activities, according to the guidance.