The Changing Face of Social Media: New SEC Guidance on the Testimonial Rule and Social Media

As increasing consideration is given to the use of social media in the financial industry, the Securities and Exchange Commission ("SEC”) continues to follow in-step with evaluating new developments and concerns in its March 2014 Investment Management (IM) Guidance, released by the Commission’s Division for Investment Management. Spurred on by questions of the Investment Advisers Act of 1940’s “Advertisements Testimonial Rule” [Rule 206(4)-1,specifically 206(4)-1(a)(1)] within the context of social media, the Guidance “seeks to clarify application of the testimonial rule…to the dissemination of genuine third-party commentary [on social media] that could be useful to consumers.”

The original intent of Rule 206(4)-1 was to focus on “testimonials when used in investment advisory advertisements”, particularly to avoid “fraudulent, manipulative or deceptive” claims or inferences about a client’s experience with an adviser. Determining whether social media content constitutes a testimonial is “dependent on all of the facts and circumstances related to the statement.”

In the new Guidance, some of these “facts and circumstances” are clarified. For example, while an “explicit or implicit” client experience statement or “endorsement” of an adviser on a financial institution’s social media page is considered a testimonial under the Rule, a client experience statement that is published on an adviser or IAR’s social media from an “independent social media site” would not fall under the testimonial provision in certain cases.

Other subjects that are given greater clarification in the Guidance include:

  • the inclusion of public commentary from independent social media sites in non-social media advertisements;
  • client contact lists displayed on social media; and
  • the use of public commentary on fan or community pages.

In aiding investment advisers to further define the intricacies of social media adviser advertising, this Guidance aims to help firms “develop compliance policies and procedures reasonably designed to address…the publication of any public commentary that is a testimonial” within social media’s “evolving technology.” For further information on this and other related subjects, please contact us at info@corecls.com or (619) 278-0020.

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