Here's what investment advisors need to know now.
Since the 1940s, the SEC has forbidden RIAs from promoting client endorsements or testimonials in anything that constitutes an "advertisement." Rule 206(4)-1 under the SEC Investment Advisers Act of 1940 prohibits an RIA from publishing, circulating or distributing any advertisement which refers -- directly or indirectly -- to any testimonial of any kind concerning the RIA or any advice, analysis, report or other service rendered by the investment advisor.
But in the digital age, clients can effortlessly use social media to endorse and recommend their advisors with just a few clicks. The SEC has issued a couple of clarifications related to social media. Back in January 2012, it published a National Examination Risk Alert on Investment Adviser Use of Social Media, outlining its concerns about RIAs' use of social media and describing how clients can provide recommendations and endorsements. More recently, in March 2014, the SEC issued Guidance No. 2014-4 -- Guidance on the Testimonial Rule and Social Media -- providing further clarity on investment's advisors' use of third party commentary on social media.
How could a third-party comment or social media "action" be viewed as a "testimonial" on social media and therefore prohibited? One thing is clear: In its guidance, the SEC says an investment advisor should not invite its clients to post commentary directly on the investment advisor's own social media site or page.
But what uses of third-party commentary would be permissible by the testimonial rule?
LINKEDIN RECOMMENDATIONS & ENDORSEMENTS
LinkedIn endorsements and independent recommendations about the advisor's skills should be avoided. An endorsement can occur in two ways: A client could endorse an advisor for a skill that is already listed on his or her profile or a client could initiate an endorsement for a new skill that does not already appear on the advisor's profile.
To avoid the first scenario, advisors should select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile to turn off the feature that allows clients (other LinkedIn users) to "endorse" their skills. In addition, if a connection attempts to add a new skill to the advisor's profile, the advisor should reject the endorsement to avoid violating the testimonial rule under the Advisers Act.
In addition, if a connection attempts to add a new skill to the advisor's profile, the advisor should reject the endorsement to avoid violating the testimonial rule under the Advisers Act.
Recommendations on LinkedIn are completely separate from endorsements. They are free-form written opinions of one's professional skills, accomplishments or experience. A client can choose to recommend an advisor or an advisor could request such a recommendation.
If advisors receive unsolicited recommendations, they have the ability to review and approve the recommendation before it appears publicly on their profile. Advisors should not accept or request any recommendations on LinkedIn. Advisors may also want to add a preemptive note to the Summary section of their profiles to say up front that they will not accept recommendations or endorsements.
Advisors should avoid retweeting any tweet from either a securities research analyst or a client who is providing a testimonial about the advisor's performance or a product or service of its firm.
SOCIAL MEDIA LIKES
Many firms also worry about the interpretation of a like on Facebook or LinkedIn, or having viewers choose to "favorite" a tweet. Likes can mean many things: For example, a like from a third party may simply indicate that a visitor enjoyed an article that was shared or appreciates the artwork on a page.
Much depends on context: The 2012 SEC Risk Alert was careful to state that interpretation of a like as a testimonial is based on the facts and circumstances. A like that an advisor solicits as an indication of a client's experience with the firm may be construed as a testimonial. However, a like on a photo of an advisor's new baby may not.
LINKS TO THIRD-PARTY SITES