Investment Advisers Need to be Cautious what They Post on Social Media – SEC Continues to Develop Regulations on this IssueCrelano@mahadvising.com
Investment Advisers Need to be Cautious what They Post on Social Media – SEC Continues to Develop Regulations on this Issue
Update on U.S. Investment Fund
SEC enforcement defense or Securities and Exchange Commission reiterated on July 10th that social media is covered by securities laws. Specifically, the SEC published five settlement orders (the “Settlements”) in response to allegations of infringements of the Investment Advisers Act of 1940, as amended (“Advisers Act”), and Rule 206(4)-1(a)(1) thereof (the “Testimonial Rule”). The Settlements primarily involved social media and other websites that published client testimonials posted by RIAs (“SEC-registered investment advisers”), FINRA enforcement defense adviser representative of a RIA (“IAR”), and marketing consultants hired by the RIAs and IARs. By bringing together the SEC the Settlements, and the Staff demonstrate that they (“the Staff”) have adopted their 2014 Guidance on the Testimony Rule (discussed below) for the purpose of enforcement. Further evidence that the Staff is focusing on social media usage by RIAs generally is the Settlements presented by the Chicago Regional Office, which arise from examination referrals made by the Chicago Office.
A Global Takeover of Advertisement by Investment Advisers
In accordance with Section 206(4) of the Advisers Act, RIAs are prohibited from engaging in any practice, activity, or business that is dishonest, misleading, or deceptive, also the Rules 206(4)-1 identify and effectively prohibit improper statements used in advertisements by registered investment advisors, which violate the Act. One such prohibition, which is Testimonial Rule, restricts the use of “any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.”
It can be difficult for RIAs to apply Rule 206(4)-1 to modern forms of communication, as the rule was adopted in 1961 and has not been substantially amended. For example, the rule defines an advertisement as anything that is written, broadcast, or displayed on a social media site. It is generally interpreted to cover anything from statements issued by the RIA or its representatives through social media to statements released by third parties. A client’s experience with a particular investment adviser or endorsement of that adviser is not defined in the Advisers Act or in the rule. The Staff interprets the term as a “statement of their experience with a particular investment adviser.”
The Staff stated in a risk alert in 2012 that “nearly any social media website maintained by an investment adviser” constituted an advertisement, and even a simple “like” button constituted a testimonial.
Staff members published a guidance update (“2014 Guidance”) on March 28, 2014, which discussed, among other topics, outsource compliance the practice of RIAs soliciting client testimonials to be featured on social media websites. By acknowledging that not all public comments posted on social media websites constitute prohibited testimonials, the 2014 Guidance substantially reduced the uncertainty surrounding RIA social media sharing. Staff stated in the 2014 Guidance that direct commentaries by clients regarding their own experiences with, or endorsements of, RIAs may constitute testimonials when the RIA assisted or requested the comment. It was pointed out that client comments posted on a RIA’s website, blog, or social media account would constitute a testimonial that would not be permitted.
By settling complaints, SEC demonstrates its commitment to enforcing the 2014 Guidance.
The Latest Settlements
As a result of the Settlements, a marketing consultant, two RIAs, and three IARs, illegally advertised testimonials on the web that violates the Testimonial Rule. Based on the Settlements, the RIAs violated Rule 206(4)-1(a)(1) and Section 206(4) of the Advisers Act thereof by committing the acts detailed below, and the IARs or marketing consultant caused violations.
The settlement claims that a RIA posted two videos on its public website as well as YouTube containing client testimonials. Videos among the testimonials showed clients expressing their gratitude for the RIA’s services for providing peace, income, and security.
-Three of the other Settlements allege that a RIA and its IAR, as well as two IARs employed by other investment advisers registration not included as parties to the actions, hired a marketing consultant and his company, Create Your Fate, LLC (“Create Your Fate”), to solicit testimonials from clients, which were then published on various social media and other websites. The fifth Settlement was directly against the marketing consultant, who was not a RIA or an IAR. The testimonials included statements indicating the RIA and IARs were knowledgeable and trustworthy, helped clients generate investment returns, Broker dealer registration, enabled the client to access unique investment opportunities, and protected the client’s investments from risk. Create Your Fate published a number of these testimonials on the RIA’s and IARs’ social media websites. Create Your Fate used the solicited testimonials in videos captioned “Five Star Review,” which were posted to YouTube and the RIA’s and IARs’ public websites. The videos included the contact information and a link to the settling RIA’s and IARs’ websites. The Settlements also allege that one of the RIAs orally solicited clients and other individuals to publish testimonials directly on independent social media websites like Youtube.com.
Consequences for Practices
a. Images, videos, and podcasts are considered advertising in accordance with the Testimonial Rule.
A Settlement involving fairly straightforward facts involved another Settlement. Two videos were allegedly posted by the RIA to its website and onto YouTube, according to the SEC. RIAs have been deemed to be advertising their advice and services by using testimonials containing client testimonials, thus violating the Testimonial Rule.
Podcasts and other forms of media, such as videos, should be created with the awareness that they are considered “advertisements” and may contravene the Testimonial Rule if their content contains client testimonials.
b. The SEC enforces its 2014 guidance regarding the contents in social media.
Another question raised by the Settlements is: Does a RIA have any liability for social media posts made by third parties? Based on the settlements in these cases, it looks like the SEC is being more proactive about taking action against statements made on social media by RIAs or about them, consistent with the 2014 Guidance’s objectives.
The 2014 Guidance addresses the underlying facts in these settlements: “if an investment adviser or IAR invited clients to post . . . public commentary directly on the investment adviser’s own internet site, blog or social media website that served as an advertisement for the investment adviser advertising review or IAR’s advisory services, such testimonials would not be permissible.”
Under the 2014 Guidance, not every social media testimonial about a registered investment adviser advertising review or its employees are considered impermissible. According to the 2014 Guidance, there are guidelines for evaluating whether commentary posted on a social media website does not reflect the influence of a RIA or its affiliates so as to exclude it from the scope of the Testimonial Rule. Due to the fact that the commentary was commissioned directly and indirectly by the RIA and IAR, the commentary was not deemed to be sufficiently independent. RIAs should be aware that invitations, requests, and solicitations are not the only factors that can qualify as impermissible testimonials from third parties. The 2014 Guidance should be reviewed for RIAs to be sure they don’t act in a way that might be interpreted by the Staff as subverting otherwise independent social media commentary, such as removing unfavorable comments or submitting false testimonials.
RIA’s Staff Priority is Regulating RIA’s Social Media Use
One of the reasons the Staff is focusing on RIAs’ social media activities is not only the result of these Settlements, but also a response to the growth of social media use in both investments and financial services. In addition, as of the last two years, the SEC and its staff have also begun to pay greater attention to the social media sites of RIAs.
Recently amended Form ADVs now oblige RIAs to disclose more information regarding the usage of social media. As part of the new disclosure requirements, RIAs now have to reveal the urls of each social media account they maintain on publicly available sites such as LinkedIn, Twitter, and Facebook. This amendment removed the requirement to disclose the RIA’s social media pages from Form ADV, which previously requested only access to its own website. The Staff noted, during the adoption of the amendments, that, given the rapidly changing nature of social media environments, it was imperative that the Staff receive more details regarding RIAs’ use of social media.
In addition, the Office of Compliance Inspections and Examinations of the SEC (“OCIE”) undertook a series of nearly 70 sweep examinations focused on certain RIA or investment adviser compliance review or issues, including the use of testimonials, beginning in 2016. The results from this initiative confirmed that RIAs frequently include client statements describing RIA services and/or endorsements in advertisements, including firm websites and social media pages. In light of the SEC’s focus and the expansion of the use of social media in the investment management industry, RIAs should prepare for more frequent and detailed reviews of RIAs’ websites and social media pages as part of the OCIE examination process.
Furthermore, starting in 2016, testimonial use and specific RIA or investment adviser advertising review matters are the primary concern of the OCIE (“Office of Compliance Inspections and Examinations”) of the SEC, which conducted a sweep of nearly 70 firms.