Earlier this week, staff from the SEC Division of Investment Management issued a registered investment advisor (RIA) compliance guidance update on RIA usage of social media and the applicability of the testimonial rule. This is a major RIA compliance event as this is one of the first times that the SEC staff has directly addressed the RIA industry's growing use of social media and the possible investment adviser compliance issues. In addition, this is the latest example of the SEC staff making a much more concerted effort in recent times to provide guidance and education to assist investment advisory firms in complying with their RIA regulatory obligations.
The SEC staff notes that increased social media usage by both RIA firms and consumers coupled with a consumer demand for independent, third-party reviews has led to a need for the SEC staff to provide some additional clarity on how the existing testimonial rule applies in such circumstances. The investment adviser testimonial rule commonly refers to Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940 which generally prohibits investment advisers from using client testimonials when advertising.
However, the SEC in this RIA regulatory compliance update, attempts to provide further guidance on when "in certain circumstances, the publication of all of the testimonials about the investment adviser or investment adviser representative (IAR) from an independent social media site on the investment adviser's or IAR's own social media site or website would not implicate the concern underlying the testimonial rule."
The SEC staff further states that "Rule 206(4)-1(a)(1) was designed to address the nature of testimonials when used in investment advisory advertisements...whether public commentary on a social media site is a testimonial depends upon all of the facts and circumstances relating to the statement." In other words, an investment advisory firm needs to look at such commentary on a case by case basis. To assist, the SEC addressed some common scenarios with more clear guidance:
- An investment adviser may not invite clients to post public commentary on the RIA's own website, blog, or social media site that services as an advertisement for the firm.
- Under certain circumstances, an RIA may publish the full commentary from an independent social media site.The circumstances allowing such publication would include:
- The RIA firm has no ability to impact which public commentary is included or published on the social media site.
- No public commentary is restricted or suppressed in any way on the social media site.
- All public comments, positive and negative, are fully viewable on the social media site.
- The social media site must be truly independent from the investment advisory firm.
- The RIA firm publishes all commentary completely unedited with no control over the order of the commentary, etc.
- The comments must be published in a "content-neutral manner, such as by chronological or alphabetical order, which presents positive and negative commentary with equal prominence."
- The investment adviser has not directly or indirectly submitted any commentary on the social media site.
- The RIA firm firm has not compensated any social media user in any such manner for authoring commentary.
- If the independent social media site provides any type of mathematical rating system, neither the social media site or investment advisory firm may provide any additional subjective analysis of the rating.
- It may be permissible for an RIA firm to have a list of "friends" on its social media site if:
- The list does not display current or past clients any differently from others on the list.
- The RIA firm does not attempt to imply that the list of friends have had a favorable experience with the investment adviser, etc.
As RIA compliance consultants, we strongly recommend that the principals and Chief Compliance Officer of all investment advisory firms review the SEC's social media guidance update in full detail as social media compliance is still a very much evolving RIA compliance topic. All SEC-registered RIA firms should review their firm's compliance policies and procedures to ensure that they reflect the SEC's latest guidance on RIA social media usage.