In response to requests from the financial industry, the Security and Exchange Commission (SEC) recently issued Guidance on the Testimonial Rule and Social Media. This Guidance explores the circumstances of how financial advisers may use testimonials on social media without violating the Investment Advisers Act of 1940. The “Advisers Act” was designed to protect the investing public and to prevent deceptive or manipulative advertising practices. This included prohibiting testimonials, as investors might misunderstand that the experience of one person would be typical of all persons. After all, “by their very nature [testimonials] emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable” (Rule 206(4)-1).
As more people use social media to conduct research, communicate and make financial decisions, firms are increasingly challenged to enable their employees to use this new tool while complying with various rules and regulations that govern electronic communications. In fact, there are more than 10,000 rules and regulations pertaining to electronic communications within the United States alone. In addition, specific industries such as financial services, pharmaceutical, energy, health care and the public sector, each with their own sets of rules and regulations designed to protect the public. These rules typically fall into the categories of record keeping, advertising and supervision.
The very nature of social media is that is flattens the playing field and allows us all to communicate directly and to share our experiences without the protection of the corporate marketing filter. In the financial industry, for example, financial advisers seek to use social media to prospect and attract new clients, especially a younger generation of investors, and to differentiate themselves from their competitors. There is even talk that social media is the end of the cold call, because, after all, we are all connected in some way, and thus, everyone is a “warm lead.”
At the same time, consumers expect to be able to tap the experiences of their peers before they buy a product or use a service. They read reviews on anything and everything, from hotels and restaurants to maid services, cars, appliances and electronics before they make decisions. But for one of the most important decisions they could make, selecting a financial adviser, there were no reviews available due to long-standing regulatory prohibitions against testimonials. In fact, until recently, very few financial services firms allowed their advisers to use social media at all.
In reaction to these dual pressures, financial services firms are carefully venturing into these new waters and are pushing their regulators for guidance on how to interpret existing rules and regulations vis-à-vis social media.
The SEC Guidance was issued in Q&A format and attempted to address some of the questions that firms and advisers have been asking. In short, in certain circumstances, financial advisers may now accept testimonials on social media. There are caveats, of course. The testimonials must be completely independent and have no “material connection” to financial advisers or investment advisory representatives (IARs).
A few specific “no’s” from the SEC include:
- No explicit client experiences on financial advisers’ personal social media sites
- No posts from other social media sites unless the public has equal access to all the commentary available
- No authored or edited testimonials
- No compensation for testimonials
- No highlighting favorable or removing unfavorable testimonials
Although testimonials may now be used within certain circumstances, the FA or IAR cannot “cherry pick,” and highlighting the best and deleting the rest. If they allow one, they allow all. As is. And investors must have the ability to see all the testimonials equally.
So how does this new guidance impact financial services firms?
Until this guidance came out, larger firms typically prohibited financial advisers from using Recommendations and Skills & Endorsements on LinkedIn, Retweets on Twitter and Likes on Facebook to avoid the appearance of an endorsement or testimonial. Firms will now need to evaluate whether the advantages of favorable testimonials outweigh the reputational risk of bad ones. If firms do allow Recommendations on LinkedIn for example, they will also need to update their existing social media polices with enough detail so that financial advisers understand that they must remain independent of the creation and editing of testimonials. No editing Recommendations or making suggestions of content. Firms will also need to put plans in place for how to handle the negative commentary that is bound to come.