The staff of the Division of Investment Management (Staff) of the Securities and Exchange Commission (SEC) has issued an IM Guidance Update (Guidance Update) on the use of social media in investment adviser advertising. The Guidance Update seeks to clarify when registered investment advisers1 may use reviews available on independent social media sites2 without violating Rule 206(4)-1(a)(1) under the Investment Advisers Act of 1940 (Testimonial Rule).
In recent years, the SEC and its Staff have focused their attention on investment advisers’ increasing use of social media. The SEC’s Office of Compliance Inspections and Examinations (OCIE) conducted sweep examinations of investment advisers in the past few years, requesting information about such investment advisers’ social media policies and procedures. And, in January 2012, OCIE issued a National Examination Risk Alert on the use of social media by registered investment advisers (Risk Alert).3 For further information regarding the Risk Alert, please refer to "SEC Publishes Risk Alert on Investment Adviser Use of Social Media," DechertOnPoint (January 2012).
In light of these sweep examinations and the uncertainty faced by investment advisers as to permissible social media practices, the Staff has sought to provide more direction. Prior to issuing the current Guidance Update, the Staff issued an IM Guidance Update concerning the application of SEC filing requirements for certain mutual fund-related communications on real-time electronic forums.4 While the publication of the Guidance Update is welcome, it focuses only on a narrow set of circumstances, leaving open a number of significant questions about the application of the Testimonial Rule to common uses of social media.
The Guidance Update notes that the SEC considers testimonials to be inherently misleading when used in advertisements because investment advisers generally only include positive testimonials and disregard negative ones, which may give rise to the mistaken inference that the person giving the testimonial is a typical client of the investment adviser. The Testimonial Rule does not define in detail what constitutes a “testimonial,” and whether a statement is a testimonial is a facts and circumstances determination. The Staff, however, indicates that testimonials include statements where clients endorse, or otherwise describe their experiences with, an investment adviser.
Criteria for Including Social Media Commentary in Advertisements
The Staff affirms that the Testimonial Rule continues to restrict testimonials posted on an investment adviser’s own social media site. The Staff recognizes, however, that the concerns of publishing testimonials on traditional media may not be present in social media because social media “allows for instantaneous updating of posted commentary and concurrent viewing of all of the comment history.” Accordingly, the Guidance Update indicates that an investment adviser may publish on its own social media site commentary from an independent social media site, if:
- Independence. The commentary from the independent social media site is provided by commentators who are independent of the investment adviser.
- No Material Connection. There is no “material connection” between the independent social media site and the investment adviser that would “call into question the independence” of that social media site or commentary.
- Completeness. The investment adviser makes available all of the commentary found on the independent social media site concerning the investment adviser, without any edits.
According to the Guidance Update, reviews on an independent social media site that are either directly or indirectly drafted by investment advisers are not independent. The Guidance Update indicates, as an example, that an investment adviser who directed its employees to write reviews about the investment adviser on an independent social media site, and then proceeded to use those testimonials in advertisements, would violate the Testimonial Rule.
A material connection would exist where an investment adviser influenced the commentary in some way by selectively censoring, accentuating or editing the content. The Guidance Update states that a material connection between an investment adviser and an independent social media site could also exist if, for example, the investment adviser compensated a social media user (including with the offer of any product, free service or discount) for writing a review. However, the Guidance Update does not prohibit an investment adviser from encouraging or inviting persons to write favorable reviews on independent social media sites, in the absence of compensation.
According to the Staff, advertising on an independent social media site would not necessarily impeach such site’s independence or establish a material connection, if: (1) it would be “readily apparent to a reader” that the investment adviser’s advertisement is a sponsored statement that is separate from the public commentary available on the site, and (2) the receipt (or non-receipt) of advertising revenue did not affect which public commentary is made available on the site.
An investment adviser wishing to include on its own social media site commentary found on an independent social media site must publish the commentary in its entirety. An investment adviser may not arrange the commentary in a manner that emphasizes favorable reviews while de-emphasizing negative reviews. The Guidance Update allows investment advisers to order the commentary in a “content-neutral manner” or to set up a system on its own site that allows users to sort commentary by any criteria, including by the lowest or highest rating. However, the investment adviser, itself, may not arrange the reviews in a non-content-neutral manner.
Technological constraints may limit the practical usefulness of the Guidance Update. For example, unless an investment adviser has the capability to enable real-time updates on its own site as new comments are posted on independent social media sites, the investment adviser would be limited to posting links on its own social media site to the sites on which the commentary is posted or else providing the web addresses of the independent social media sites.
Ratings of Investment Advisers
The Staff states that investment advisers may publish testimonials that include a “mathematical average of the commentary,” so long as such ratings are not based on a system “designed to elicit pre-determined results” favorable to the investment adviser. However, investment advisers may not accompany such a rating with their own subjective analysis. The Guidance Update is silent as to whether investment advisers may provide only the mathematical average rating without providing the content of the commentary itself.
Traditional Media Advertisements
Under the Guidance Update, investment advisers may not publish testimonials from an independent social media site in their traditional media advertisements, such as newspaper or television advertisements, but may point out to readers or viewers that public commentary concerning the investment adviser is available on particular independent social media sites, and even include such sites’ logos.
“Friends” on an Investment Adviser’s Social Media Site and “Fan” Sites
The Guidance Update notes that a list of “friends” or “contacts” on a social media site accepted “in the normal course” would generally not constitute a testimonial. A community or fan website established by an unrelated third party also generally should not implicate the Testimonial Rule. However, the Staff cautions that investment advisers who publish content from, or use traditional or social media to direct persons to, such websites may still be subject to the Testimonial Rule. Consequently, the Staff warns that an investment adviser may not group its friends or contacts in a manner that is intended to signal which friends or contacts are current or past clients, or otherwise to indicate that such friends or contacts had favorable results using the investment adviser. Note that in the 2012 Risk Alert, OCIE stated that a “like” by a third party on an investment adviser’s own social media site might, in some circumstances, be considered a testimonial within the meaning of the Testimonial Rule.5
The Staff’s guidance that an investment adviser’s publication on its own social media site of all of the commentary available on an independent social media site would not violate the Testimonial Rule initially appears to expand the opportunities to utilize social media as a means of advertisement. However, upon further analysis, the criteria the Staff sets forth only provide limited guidance on applying the Testimonial Rule in the context of social media advertising. A broader interpretation of the Testimonial Rule will be required to permit investment advisers to utilize social media meaningfully as part of their marketing programs.