The SEC recently provided guidance in a March IM Guidance Update regarding the application of Section 206(4) of the Advisers Act (the Testimony Rule) to the use of social media. In recognizing that the use of social media has increased the demand for independent third-party commentary and reviews for service providers (including investment advisers), the SEC’s guidance is aimed at assisting investment advisers apply the rule that prohibits investment advisers from using testimonials in their advertisements with respect to advertisements that feature public commentary about such investment adviser on independent, third-party social media sites.
The Testimony Rule generally prohibits an investment adviser from publishing, circulating or otherwise distributing “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 adviser.” The purpose of this prohibition is to address the potential that a testimonial may give rise to a fraudulent or deceptive implication that the experience of a person giving the testimonial is not unique to such person. However, the SEC staff has clarified that an investment adviser’s publication of an article by an unbiased third party regarding such investment adviser’s performance would not be a testimonial unless it also included a statement of a client’s experience with, or endorsement of, the investment adviser. In its guidance, the SEC further clarified its positions with respect to third-party commentary, the inclusion of advertisements on independent social media sites, client lists, and fan/community websites.
With respect to third-party commentary, the SEC staff clarified that an investment adviser may not publish public commentary that is an explicit or implicit statement of a client’s experience with, or endorsement of, the investment adviser. However, an investment adviser may publish the same public commentary on its own social media site if it comes from an independent media site when (1) the independent social media site provides content that is independent of the investment adviser, (2) there is no material connection between the independent social media site and the investment adviser, and (3) the investment adviser publishes all commentary appearing on the independent social media site. The SEC staff distinguished these cases by noting that when an investment adviser does not have any ability to affect which public commentary is included, such public commentary is not restricted and all public commentary is viewable, then the concerns presented by the Testimony Rule may not be implicated. Further, the SEC noted that whether commentary is “independent” depends on the facts and circumstances of such commentary, with particular attention being paid to whether the commentary was directly or indirectly authored by the investment adviser, whether a material connection exists between the independent social media site and the investment adviser, and whether any compensation was provided to the independent social media site from the investment adviser.
With respect to inclusion of investment adviser advertisements on independent social media sites, the SEC noted that an investment adviser may publish commentary from an independent social media site, so long as the investment adviser complies with the “material connection” and “independence factors” described above. Thus, the inclusion of an advertisement from the investment adviser on an independent social media’s site would not, in and of itself, cause the publication of the public commentary to violate the Testimony Rule.
In its guidance, the SEC also explained that while a list or photographs of “friends” on an investment adviser’s social media site that is viewable by the general public is not generally a “testimonial”, it is still an advertisement that may be false or misleading and would still therefore be in violation of the Advisers Act. For instance, if the investment adviser attempts to create the inference that the friends listed on such investment adviser’s social media site experienced favorable results from the investment adviser, such a publication could be in violation of the Advisers Act.
Finally, the SEC clarified that persons unaffiliated with the investment adviser may establish various “community” or “fan” pages where the public may comment on a variety of investment topics, including the performance of the investment adviser, without violating the Testimony Rule. The SEC did, however, caution investment advisers to consider all relevant facts when determining whether to public such content on its own site.
In light of this guidance, investment advisers should examine their advertising policy with respect to testimonials on social media to ensure they are compliant with various requirements highlighted in the guidance.