SEC Guidance for Investment Advisers on the Testimonial Rule and Social Media

July 08, 2014

Reading time : 4 minutes

Under Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940 (Advisers Act), an investment adviser is prohibited from publishing, circulating, or distributing any advertisement that 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 the investment adviser.  With today’s wide spread use of social media, there has been a lot of concern among investment advisers regarding what would constitute a testimonial when using social media.  In March 2014, the U.S. Securities and Exchange Commission (SEC), Division of Investment Management, issued a Guidance Update to provide some guidance on the testimonial rule and social media.  Through this guidance, the SEC Division of Investment Management is seeking “to clarify application of the testimonial rule as it relates to the dissemination of genuine third-party commentary that could be useful to consumers.”

In this Guidance Update, the SEC Division of Investment Management seeks to assist investment advisers “in applying Section 206(4) of the [Advisers Act] and Rule 206(4)-1(a)(1) thereunder (testimonial rule) to their use of social media.”  Additionally, it seeks to “assist investment advisers in developing compliance policies and procedures reasonably designed to address participation in this evolving technology, specifically with respect to the publication of any public commentary that is a testimonial.”  In order avoid violating this rule, an investment adviser must first understand what constitutes a testimonial.  The term testimonial is not defined under the Advisers Act but the release indicates that the SEC staff has consistently interpreted the term testimonial to include a “statement of a client’s experience with, or endorsement of, an investment adviser.”  In the past, as well as in this guidance, the SEC staff has indicated that whether public commentary on a social media site will constitute a testimonial will depend on the facts and circumstances relating to the statement.  Through a question and answer format, the release provides specific examples of forms of public commentary that may or may not be considered testimonials depending on the facts and circumstances and elaborates on those facts and circumstances that must apply in order to avoid violating the testimonial prohibition. An investment adviser seeking to use social media sites that may include material that could potentially be deemed testimonials are encouraged to read the Guidance Update closely. The investment adviser should then review its policies and procedures to make sure that the policies and procedures adequately address the facts and circumstances specifically related to the investment adviser that could result in a violation of Rule 206(4)-1(a)(1).

On June 19, 2014, RIA Compliance Consultants presented a webinar, “Compliance Requirements for Investment Adviser Advertising and Marketing.” This webinar was presented by our consultants to help investment advisers gain a better understanding of the compliance requirements and prohibited practices for investment adviser marketing and advertising.  Our discussion included some requirements specifically related to performance advertising, as well as, discussion on the use of social media and the prohibitions on the use of testimonials.  We also provided some tips and best practices for preparing, supervising, and approving your investment adviser’s marketing and advertising materials.  A recorded version of this webinar is now available.  If you would like to view the recorded session, click here to purchase it for $69.95.

RIA Compliance Consultants can assist you with your investment adviser’s concerns regarding its advertising and marketing materials.  Our consultants can answer your general questions, review your advertising and marketing materials, or help you develop your investment adviser’s policies and procedures for supervising, reviewing, and approving advertising and marketing materials.  For more information on how we can assist your investment adviser, contact your consultant if you are an existing client or click here to schedule a time to further discuss our services with one of our Senior Compliance Consultants.

Posted by Bryan Hill
Labels: Advertising, Marketing, SEC, Social Media, Uncategorized