SEC To RIAs: Don't Use Facebook "Like" Buttons; SEC Provides Guidance On What Constitutes A Testimonial

Monday, January 09, 2012 15:06
SEC To RIAs: Don't Use Facebook

The U.S. Securities And Exchange Commission does not like Facebook “like” buttons to be used by Registered Investment Advisers, or at the very least wants RIAs to use “like” buttons very carefully.  

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The staff of the Securities and Exchange Commission’s Office of Compliance and Examinations (OCIE), which inspects federally regulated Registered Investment Advisers, published a National Examination Risk Alert last week that provides RIAs with guidance on their use of social media.
Most of the guidance contained in the seven-page document was nothing new. However, OCIE did directly address the use of a Facebook “like” button by RIAs and shed some light on what constitutes a “testimonial.”
“The term ‘testimonial’ is not defined in Rule 206(4)-1(a)(1), but SEC staff consistently interprets that term to include a statement of a client's experience with, or endorsement of, an investment adviser,” says the SEC alert. “Therefore, the staff believes that, depending on the facts and circumstances, the use of “social plug-ins” such as the “like” button could be a testimonial under the Advisers Act.
“Third-party use of the “like” feature on an investment adviser’s social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client's or clients' experience with an investment adviser or IAR,” the SEC staff adds. “If, for example, the public is invited to “like” an IAR’s biography posted on a social media site, that election could be viewed as a type of testimonial prohibited by rule 206(4)-1(a)(1).”
The SEC is basically saying it’s going to look at whether a “like” button is soliciting and publishing testimonials for an RIA. That's prohibited.
While an RIA can presumably use a like button on a posting about new tax rules or on an article saying the economy is doomed, it would be unwise for RIAs ask people to “like" your firm or you. Similarly, seeking “fans” is a bad idea. The SEC says it could constitute using a testimonial in your advertising, which is prohibited.
Of course, RIAs, IA reps, and solicitors also should not seek and publish “recommendations” on LinkedIn. That’s been widely known in the investment advice business for at least two or three years.
You can’t stop clients from publishing recommendations for your on their LinkedIn profile pages—that’s their Fifth Amendment right—but you may not publish their recommendations on your LinkedIn page or elsewhere.
What the SEC says in the alert about testimonials is also helpful in clarifying what RIAs, IA reps, and solicitors can and can't do with regard to using social media profile popularity tools, it leaves plenty of gray areas.
For example, does the SEC object to an advisor using target client profiles in marketing materials? This is a fairly common marketing device wherein an RIA explains its investment advice services by providing prospective clients with digital or hard-copy content about a use case for an RIA's services, highlighting how the RIA worked with an unnamed retiree, doctor or other target client. (A disclosure says the target client is not a real person.) Such composites are commonly used by RIAs without any known objections by OCIE.      
The SEC historically permits a new communication medium to be used in marketing by RIAs and then limits it in disciplinary actions filed against firms. Last week’s alert, in fact, was issued in connection with a fraud case filed by the SEC charging an Illinois-based investment adviser with offering to sell fictitious securities on LinkedIn.
Generally, the SEC is not effusive in offering RIAs guidance on how they can use new communications technology like social media because most of the rules are fairly straightforward: disclose conflicts, do what’s best for the client, don’t lie, don’t commit fraud, follow recordkeeping rules, and maintain and create policies governing services and communications.  
Getting any guidance on social media use by RIAs is really helpful to RIAs, particularly guidance on like buttons, which are used by Google Plus and other social networking sites but were popularized by Facebook. 
For the record:  A discussion on A4A December 21 addressed the need for guidance from the SEC on like buttons. “We won't know for sure that "likes" are the same as testimonials unless the SEC takes disciplinary action against an RIA and makes that action public. But many RIAs are already using 'likes' on their websites and have not been slapped. Not yet, at least.”

It's good the SEC has cleared this up. Gives RIAs a chance to clean up their mistakes before they're examined.


Comments (4)

Chris Winn
This "Risk Alert" again demonstrates that the SEC is still missing the mark on advertising and communications.

Testimonials have been an area of confusion long before the facebook "Like" or the LinkedIN "Recommendation". The SEC rules are fairly clear that an advisor or its advisory persons cannot solicit or accept 3rd party endorsements. The challenge as you allude to is that there has always been a lack a action to follow-up the SEC guidance. The have been very few sanctions for testimonials on website and other advertisements and no real guidance on social media.

This of course creates several challenges for advisors leveraging social media as part of their marketing and client service model.

First off, one needs ~25 "Likes" on a Company Page to allow the company to obtain its own management of the Company Page. Otherwise the page is attached to a person of the company. The advisor can delete the posts including "Likes" as part of a site monitoring program, but this does appear to be self-defeating. Developing content with the intent that users get value and then deleting as soon as someone finds that value is problematic.

I would expect continued evaluation of this feature in the coming year. It appears that the Testimonials rule is ripe for redrafting. I find very little difference from someone engaging your site by following you, linking in with you or liking you. Wouldn't any association reflect some level of endorsement?

If you follow the logic of the SEC with their comments on the "Like", where does it stop? Does any association with an advisor become an endorsement?

A good point in Andy's post is that there has not been a good defining case study or a sanction from the SEC to provide any real guidance. Most social media sanctions have really been violations of other securities laws that were just exposed quicker or delivered through social media.

SEC - we urge you to assemble a panel of advisors, media, technologists and compliance professionals to get through this matter. Social media is not going away. There cannot be a continued disjoint between the needs of clients and the ability of a service sector to deliver.

Chris Winn , January 10, 2012
Wow - is this really a priority for the SEC? Is that not the larger question?
brentb843 , January 11, 2012
No one has ever received a referral or engaged a new client who did not "know, like and trust" them. It is the foundation on which business is done in every business. Do you hire anyone you don't "like"? Do you hire anyone you don't "know"? Do you hire anyone you don't "trust"? SEC and state regulators are trying not to "mind read" on what the like MIGHT mean. But regulators work in the world of black and white. Too much grey here for this not to become an onerous problem and become an obstacle to advice provision, in my opinion.
kevinpaulcondon , January 12, 2012
Chris Winn
Completely agree!

It seems the regulators are searching for the line between black and white and I don't think that is a realistic goal.

Take LinkedIn. It is clear you can't endorse someone (or receive them), but when you visit someone's profile, they show others in the network that were also viewed. Is that association not in some way also an endorsement (by SEC logic-not mine!)?

One generally wouldn't associate publicly with someone that was not a high-caliber person. How many people accept connections because they are a contact of another trusted contact? I don't see how this really differs that much from a Facebook "Like". You are still just clicking a webpage.

This will likely shake out in the coming year, but for now we need to be cautious.

Chris Winn , January 13, 2012

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