SEC loosens rules on social media testimonials
May 1, 2014 by Linda Koco
In March, the Securities and Exchange Commission (SEC) modified its rule barring investment advisors and investment advisor representatives (IARs) from displaying testimonials.
Although targeted at SEC registered advisory firms, the guidance could have a ripple effect on all types of advisors, including those in insurance. That might happen if regulators of other types of advisors use the modification as a model for updating their own agent/advisor advertising and website standards.
Under the modification, advisory firms can publish “independent public commentary” about their firms on their own websites or social media sites, if the commentary comes from independent social media sites. They can also publish ratings (mathematical averages) from those independent sites under certain conditions.
But they are still prohibited from publishing “testimonials,” which the SEC defines as “a statement of a client’s experience with, or endorsement of, an investment advisor.” (The specific testimonial prohibition is Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940; it bars advisors from publishing testimonials of “any kind” concerning the investment advisor or concerning any advice, analysis, report or other service rendered by such investment advisor.)
The operative word in the modification of that rule is “independent.”
The advisory firm that publishes the independent commentary must have “no ability to affect which public commentary is included or how the public commentary is presented” on the site, the guidance states. In addition, the commentators’ ability to include public commentary cannot be restricted, and the site must allow for the viewing of all public commentary and updates on a real-time basis.
There is a lot more to this, so it’s best to view the SEC guidance in its entirety at IM Guidance Update No. 2014–4.
Now, here’s the heads-up for all advisors: The modification presents a framework for advisor use of independent third-party information that may spark ideas among other regulatory bodies and also compliance experts as they review social media use by the advisors they oversee.
The good part is that the guidance recognizes that consumers do use independent social media in their business considerations. It also recognizes that independent media content—as defined in the guidance—is not the same thing as a testimonial.
Inability to reference such content previously has frustrated many an advisor who has encountered clients using such social media for other purposes. For that reason, the rule modification is a significant turning point.
As the document notes, “use of social media has increased the demand by consumers for independent third-party commentary or review of any manner of service providers [emphasis added], including investment advisors.” Hence, the new guidance.
But there could be hang-ups for advisors, too. One has to do with uncertainty about abiding with the various SEC conditions for referencing such content. Advisors will need to consult their compliance authorities for insight on that, as they now do for other advertising and promotion-related issues.
Another is uncertainty about the third-party sites themselves. What type of content do they provide, and will this this change over time? How accurate is the content, and who oversees that? How many such sites exist, and will more emerge in the wake of the SEC rule modification? How will referencing a site or two impact business? Probably most advisors will consider questions like these before deciding to publish a site’s commentary.
Finally, if other regulatory authorities do start looking at modeling similar rules, it would behoove the affected advisors and advisory groups to jump into the inquiry early on, so as to have a voice in the outcome.
