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SEC Offers Guidance to Registered Investment Advisors on the Interplay of the "Testimonial Rule" and Social Media.

May 9, 2014

The Securities and Exchange Commission’s Division of Investment Management recently issued guidance to registered investment advisers on the use of social media and the publication of advertisements featuring public commentary from independent, third-party social media sites. (IM Guidance Update No. 2014-4 (the “Update”).) The purpose of the Update was to clarify the extent to which advisors may make use of social media and the circumstances under which an advisor may distribute third-party social media commentary without violating the “Testimonial Rule.”

The “Testimonial Rule”

Prior to the issuance of the Update, it was unclear to what extent an advisor could use public commentary relating to the advisor in advertisements and social media sites without violating the “Testimonial Rule” issued under the Investment Advisors Act of 1940 (the “Act”).

Section 206(4) of the Act prevents an investment advisor from engaging in any practice that is fraudulent, deceptive or manipulative. Rule 206(4)-1(a)(1) further provides that the publication, circulation or distribution, directly or indirectly, of 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 advisor, shall be a fraudulent, deceptive and manipulative act. “Testimonial” is not defined within Rule 206(4)-1(a)(1), but it has consistently been interpreted to include any statement of a client’s experience with, or endorsement of, an investment advisor. The determination of whether a third-party statement is a testimonial depends upon all of the facts and circumstances surrounding the statement.

The SEC previously extended the reach of the Testimonial Rule to social media by stating that, depending upon the circumstances, “the use of ‘social plug-ins’ such as the ‘like’ button could be “testimonial” under the Act, if it is an explicit or implicit statement of a client’s or client’s experience with an Investment Advisor." Prior to the Update, however, the SEC had not provided firm guidance on which social media behaviors were permissible under the Act and which were not.

The Update

To a large extent, the Update provides valuable clarification of how advisors may use social media without violating the Testimonial Rule.

The Update begins by establishing that an advisor may not invite clients to post public commentary directly on a website, blog or social media site that serves as an advertisement for the advisor. However, an advisor may publish the same public commentary on its website or social media site even though such commentary contains an explicit or implicit statements of clients’ experiences with or endorsements of the advisor if:

  1. The social media site that provides the content is independent of the advisor and its affiliates;
  2. The advisor publishes all of the unedited comments appearing on the independent social media site;
  3. The advisor does not draft or submit, whether in the advisor’s own name, a third party’s name or an alias, assumed or screen name, commentary that is included on the independent social media site;
  4. The advisor is not allowed to suppress the publication of all or any portion of the commentary or to edit, organize or prioritize the order in which the commentary is presented; and
  5. The advisor does not compensate any social media user for authoring the commentary, including with any product or service of value.

Additionally, an advisor may advertise on independent sites that contain independent public commentary so long as (i) it is readily apparent to a user of such site that the advisor’s advertisement is separate from the public commentary and (ii) the receipt or non-receipt of advertising revenue does not in any way influence what public commentary is included or excluded from the independent social media site.

Furthermore, the Update allows for an advisor to reference the fact that public commentary about the advisor is available on independent social media sites within the advisor’s newspaper, radio and television advertisements.


Finally, the Update also addresses the application of the Testimonial Rule to the publication of “friends” or “contacts” lists on social media sites. Consistent with previous guidance, the Update provides that as long as the contacts or friends are not organized so as to identify current or past clients of the advisor and so long as the advisor does not attempt to create an inference that the contacts or friends have experienced favorable results from the advisor’s advisory services, such publication will not violate the Testimonial Rule.

If you have any questions about the matters covered in this publication, contact any member of Greensfelder's Securities and Financial Services Group or your regular Greensfelder contact.