IA brief: SEC opens door to social media ratings and client lists
By Jason Wallace, Compliance Complete
NEW YORK, April 22, 2014 (Thomson Reuters Accelus) – The Securities and Exchange Commission’s guidance update this week on investment adviser use of social media and the applicability of the testimonial rule will help ease uncertainty over using of certain features of social media sites like Yelp, Foursquare, Facebook and LinkedIn.
The guidance, in the form of 9 questions and answers, primarily focused on the use of third-party review sites and whether it would trigger a testimonial violation. The guidance included specific examples opening the door to using Yelp, Foursquare or a similar site that offers a business review feature, granted certain conditions are achieved.
The guidance also reviews the lists a social media site may reveal to the public. For example, a list or photographs of “friends” or “contacts” that may be found on a Facebook or LinkedIn page. The SEC highlights certain provisions allowing firms to breathe a sigh of relief about using these sites.
Lastly, the guidance reviews whether having or participating in a fan/community page would violate the testimonial rule and whether it’s permissible to direct clients through non-social media to an independent social media page to receive the public commentary.
The testimonial rule
Rule 206(4)-1(a)(1) prohibits the use of testimonials in an investment adviser’s advertisements. The SEC considers the publication of testimonials to be inherently misleading because “they emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable.”
The last official guidance came from in 2012 which gave the staff’s observations regarding social-media use by advisers as identified during examinations. The alert was a broad stroke at addressing social media, leaving a lot of the specifics up to the firm.
However, the 2012 alert did address the “like” button on Facebook. The SEC stated that if the public is invited to “like” an adviser’s biography on a social-media site, or uses other plug-ins that represent “an explicit or implicit statement of a client’s experience with the investment adviser or IAR,” this could be deemed a testimonial- granted circumstances are also a factor.
Key details from the SEC guidance include:
- The SEC no longer considers non-investment commentary in advertising, such as that about an investment advisory representative’s (IAR’s) religious background or community activity, a violation of the testimonial rule.
- Publishing explicit or implicit statements of a client’s experience on the investment adviser’s own website, or an IAR’s social media site, is still prohibited as a testimonial.
- An adviser may publish the public commentary or reviews from an independent social media site without creating testimonial prohibition concerns under certain conditions. Opening up the use of Yelp, Foursquare and others by advisers to advertise their reviews and even their rating systems.
The first and most important consideration is the social media site must be truly independent from the adviser. Meaning there can be no material connection between the independent social-media site and the adviser or IAR that would call into question the independence of the independent social media site or commentary.
Notably, the firm or its IAR’s cannot have the ability to affect which public commentary is included or how the public commentary is published on the independent social media site. The public commentary cannot be restricted or suppressed, and the independent social-media site needs to allow for the viewing of all unedited, positive and negative, public commentary and the updating of new commentary on a real-time basis. Arguably, this would count out the ability to advertise the five-star rating system on Facebook business pages or the “recommendations” feature on LinkedIn as the user or adviser/IAR on both systems can control what commentary is included.
In addition, the rule only applies as long as the adviser does not compensate any commentator or provide their own observations to be included on the site, and the firm cannot impact the way the results are viewed or the order in which they’re listed. The comments must be published in a content-neutral manner (i.e. chronological or alphabetical order) giving equal prominence to both negative and positive comments.
Note: The SEC guidance even acknowledges that an adviser can publish the average score of its reviews or ratings system from a third-party site. Neither the social-media site nor advisory firm may provide any additional subjective analysis of the rating.
- An adviser or IAR may refer to public comments from an independent social media site on non-social media (i.e. newspaper, radio or television) without triggering the testimonial rule. The SEC noted that the adviser or IAR may include the logo of the independent social media site on the non-social media advertisements.For example, a firm may say “see us on Yelp.” Keep in mind if actual testimonials from the independent social media site are on the newspaper ad, it would most likely be a violation.
- There have been various opinions on whether firm’s or IAR’s “friends”, “connections” or “followers” could be construed as a testimonial, especially if one listed is a celebrity or wealthy individual. The SEC states it would not be construed that way as long as the list does not display current or past clients any differently than others on the list and the firm does not attempt to imply that the list of friends have had a favorable experience with the investment adviser.This information gives some comfort to firms that have already been using Facebook, LinkedIn and Twitter. Adviser compliance departments no longer have to remove these lists in fear they could be construed as a violation.
- A third-party creation of a social media community or fan page where the public comments on investment topics or the services of the investment adviser would not implicate the testimonial rule. However, if the adviser has a material connection to the fan/community page, and/or it is not deemed independent; comments there may be considered testimonials, especially if the investment adviser also drives traffic to such sites.
The latest guidance definitely opens the doors to some new avenues in advertising while giving comfort to some that have been used for years. However, it is prudent to bear in mind that social media compliance is heavily managed by the circumstances and even though a firm follows the recent guidance, there may be extenuating factors that would point back to testimonial prohibitions, so caution is suggested.
(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)