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SEC (Securities and Exchange Commission) Guidance on the Testimonial Rule and Social Media

In March 2014, through question and answer format, the Division of Investment Management issued an Investment Management Guidance Update on an adviser’s or investment advisory representative’s (IAR) ability to use social media and to promote client reviews of their services that appear on independent, third-party social media sites.

Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(1) (the testimonial rule) prohibit investment advisers or IARs from publishing, circulating, or distributing any advertisement that refers to any testimonial concerning the investment adviser or any advice, analysis, report, or other service rendered by such investment adviser. While the rule does not define "testimonial," the staff previously has interpreted it to mean a "statement of a client’s experience with, or endorsement of, an investment adviser."

Third Party Commentary. The guidance clarifies that in certain circumstances, an investment adviser or IAR may publish public commentary from an independent social media site if (i) the social media site’s content is independent of the investment adviser or IAR, (ii) there is no material connection between the social media site and the investment adviser or IAR that would call the site’s or the commentary’s independence into question, and (iii) the investment adviser or IAR publishes all of the unedited comments appearing on the independent social media site. The staff explained that publishing commentary that met these three criteria would not implicate the concerns of the testimonial rule and, therefore, an investment adviser or IAR could include such commentary in an advertisement.

Inclusion of Investment Adviser Advertisements on Independent Sites. The guidance also addresses the existence of an investment adviser’s or IAR’s advertisement on an independent site and notes that such presence would not result in a prohibited testimonial provided that (i) it is readily apparent to the reader that the advertisement is separate from the public commentary and (ii) advertising revenue does not influence, in any way, the determination of which public commentary is included or excluded from the independent site.

Reference by Investment Adviser to Independent Social Media Site Commentary in a Non-Social Media Advertisement (e.g., radio or newspaper). In the guidance, the staff explained that investment advisers or IARs could reference, in a non-social media advertisement, an independent social media site. For example, an adviser could state in its newspaper ad "see us on Facebook or LinkedIn" to signal to clients and prospective clients that they can research public commentary about the investment adviser on an independent social media site. In contrast, however, the investment adviser or IAR may not publish any testimonials from an independent social media site in a newspaper, for example, without implicating the testimonial rule.

Client Lists. The guidance also addressed posting of "contacts" or "friends" on the investment adviser’s or IAR’s social media site. Such use is not prohibited, provided that those contacts or friends are not grouped or listed in a way that identifies them as current or former clients. The staff carefully noted, however, any attempts by an investment adviser or IAR to imply that those contacts or friends have received favorable results from the advisory services would implicate the testimonial rule.

Fan/Community Pages. The guidance stated that a third-party site operating as a fan or community page where the public may comment ordinarily would not implicate the testimonial rule. However, the guidance cautioned investment advisers or IARs to consider the material connection and independence rules discussed above prior to driving user traffic to such a site, including through the publication of a hyperlink.

Sources: Investment Management Guidance Update, No. 2014-4, Guidance on the Testimonial Rule and Social Media (March 2014); Investment Company Institute Memorandum Regarding the Advisers Act Testimonial Rule and Social Media Guidance (April 1, 2014).

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 121
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Chris Cahlamer Investment Management Attorney
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Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he...

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Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm
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Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

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