SEC Opens Door for Social Media Endorsements of Fiduciary Advisors
Posted by Duane Thompson on April 09, 2014
>>>Recent guidance from the Commission will make it much easier for advisors to refer to favorable public commentary about themselves on independent social media sites without running afoul of the SEC’s highly restrictive client testimonial rule. The only catch is they must provide equal prominence to any unfavorable commentary, just as you would find in restaurant or movie reviews on Yelp.
In a March 31st release, SEC staff provided guidance in the form of a question-and-answer format describing how registered investment advisers can use social media that feature public commentary about them in their own advertisements. An advisory firm’s website, for example, is considered an advertisement by the SEC as well as any communication addressed to more than one person. In short, an email containing a client testimonial sent to a group list, contained in a marketing brochure or client newsletter, would be covered.
Although the term ‘testimonial’ is not defined, SEC staff has for decades interpreted Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940, commonly known as the testimonial rule, as prohibiting the use of statements of a client's experience with, or endorsement of, an investment adviser in advertisements. SEC staff over the years has stated such commentary may not be representative of an advisor’s clients overall experience. As fiduciaries, investment advisors have a duty of loyalty to act in their clients’ best interest and must therefore avoid misrepresenting their qualifications, experience or investment acumen in any manner.
That said, SEC staff for many years has informally discussed the need to update and modernize the testimonial rule, which some staff has viewed as outdated and, in addition, out of sync with advertising rules that apply to broker-dealers providing the same services. The Commission is currently evaluating harmonizing regulations that cover similar investment advisory activities of both broker-dealers and investment advisers to retail clients, including advertising rules.
Some basic takeaways become apparent after reading only a few of the 10-page release. First and foremost, the easing of restrictions on testimonials applies only to endorsements generated on independent social media sites, not on the advisor’s personal or firm website. As a rule of thumb, most of the guidance emphasizes the need to strictly avoid manipulating third-party commentary that is published in an advisor’s advertising in a way that downplays negative comments or prominently highlights favorable endorsements. Examples include prohibiting advisers from encouraging their clients, friends or colleagues in to write favorable reviews about them, or worse, providing them with quid pro quo gifts or other items of value for doing so.
If it wasn’t already clear, some of the guidance also prohibits posting favorable commentary by the advisor under an alias or screen name, or directing an employee of the firm to do so. The guidance also repeatedly cautions advisers to publish all comments from an independent website, unedited, and in a chronological, alphabetical or other neutral format that does not, for example showcase the positive comments while ‘suppressing’ some or all of the negative commentary. The commentary must also come from a truly independent site, and not from a site controlled by or affiliated with advisor, personal or corporate. Advertising by the advisor on the independent website is permitted, although it must be “readily apparent to a reader” that the ad is separate from the public commentary, and that advertising revenue did not influence the social media site’s decision to include or exclude commentary.
There were some small surprises in the new guidance as well. For many years, the SEC had considered any kind of general character reference, such as attesting to the advisor as an upstanding pillar of the community or church-going family man would have been prohibited. Now, anything unrelated to investment commentary, the guidance specifically mentioning an advisor’s “religious affiliation or community service,” would no longer be a violation.
Inevitably advisers may stumble across regulatory landmines if they take the SEC guidance too literally. Regarding the last example, in discussing non-investment endorsements, the guidance did not address financial planning services that do not have an investment component, such as budgeting and cash-flow analysis, certain estate and tax planning services, and insurance services provided in a risk-management context. Since holding out as a financial planner to the public generally triggers adviser registration on the state or federal level, it’s possible that the SEC would have concerns with other financial services offered by the individual.
Another example that comes to mind is if an advisor fails to update third-party commentary posted on the firm’s website. The SEC stresses that comments in their totality must be displayed in an advertisement and permit the viewing of all public commentary. In that regard, the question arises whether a commentary page on an advisor’s website with a link to real-time commentary would satisfy this condition.
Another issue the guidance pointedly ignored is the problem mentioned earlier regarding dissimilar advertising rules affecting dually registered broker-dealer/RIAs. The SEC offers no guidance at all, and acknowledges in a footnote that the release doesn’t seek to address the use of social media sites by broker-dealers. In 2012 commentary on the same topic, the SEC simply repeated a common mantra that the registrant “is required to adhere to both the federal securities laws and FINRA applicable rules.”
It’s easy to see why the Commission would stay away from this regulatory thicket, although it will eventually have to address the issue if regulatory harmonization proceeds. Condensed versions of both SEC and FINRA advertising rules are compared below.
SEC’s Testimonial Rule
It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the for any investment adviser…directly or indirectly, to publish, circulate, or distribute any advertisement [w]hich refers…to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.
FINRA Rule 2110
Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following: (i) The fact that the testimonial may not be representative of the experience of other customers; (ii) The fact that the testimonial is no guarantee of future performance or success; and (iii) If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial.
If the SEC’s new guidance seems premature in light of pending rules harmonization that could make it irrelevant in a few years, one might argue just the opposite, that it is more preemptive. That is to say, by putting a regulatory stake in the ground now by the Investment Management Division of the SEC, it will be in a stronger position of interpreting advertising restrictions for investment fiduciaries based on newer guidelines when confronting staff advocating FINRA’s disclaimer-type rule.
For those advisers supporting a robust fiduciary standard for brokers and investment advisers, the current testimonial rule is more in line with the traditional fiduciary duty of loyalty, in contrast to FINRA Rule 2110, which is more aligned with the commercial transactions duty of good faith and fair dealing.
From a practical standpoint, it’s speculative to predict at this early stage whether advisors will find the easing of the testimonial rule useful and might end up doing so at their own peril. Independent media sites are notorious for generating schizophrenic ratings. Commenting on an overcooked steak requires no special expertise; evaluating an advisor’s professionalism based solely on his or her ability to beat the market is a double-edged sword that may easily mask a highly competent and prudent investment process. Moreover, the new guidance prohibits you from responding, or having surrogates take up your defense, against wildly inaccurate statements. Of course, this would have been a dilemma even if the SEC had not acted to loosen the testimony rule.
In reviewing Yelp’s local financial services listings in the Washington, D.C. area, the first two comments involving a tax preparation firm were indeed black-and-white comparisons. The first review said, “This company is amazing!!!! They have the best staff – friendly and knowledgeable.” The second complained, “Worst place to get your taxes done. They screwed up my entire tax file.”
Of course, even if advisors embrace the new guidance, in the larger scheme of things there is much work left to be done in leveling the playing field between brokers and advisors. While technology-driven Millennials may find advisor ratings helpful, most will not be hiring advisors until they reach middle age. It is far more likely the traditional Madison Avenue approach to advertising will continue to carry considerable weight for years to come, and largely benefit those firms with deep pockets for advertising. Disclaimers notwithstanding, both the SEC and FINRA have been exceptionally permissive in allowing dual registrants to employ actors or celebrities in client testimonials on a firm’s investment prowess that implicate fiduciary accounts. If the Commission was surprised at all by the 2007 RAND report documenting consumer confusion over the distinctions between brokers and advisors, the SEC commissioners need look no further than at the Washington mall’s reflecting pool to understand why.
Finally, the new guidance is very narrow in its application. For example, those advisers with LinkedIn profiles will have to continue to police their pages for those eponymous ‘like’ icons – at least for now. The SEC continues to view these as inconsistent with the testimonial rule, as harmless as they may seem.
As one SEC registrant told me recently, “I get notifications of endorsements from LinkedIn every day, but I keep them blocked from view. Interestingly, most of the endorsements come from other financial planners, who you’d think would know better.”
