The staff of the Division of Investment Management (the “Staff”) of the Securities and Exchange Commission (the “SEC”) recently issued guidance concerning registered investment advisers’ use of social media and their publication1 of advertisements that feature public commentary about them that appears on independent, third-party social media sites. The guidance is meant to assist advisory firms in applying Section 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”) and Rule 206(4)-1(a)(1) thereunder (the “Testimonial Rule”) to their use of social media and in developing compliance policies and procedures reasonably designed to address participation in this technology. For purposes of this memorandum, references to the term “investment adviser” include investment advisers and investment adviser representatives, as applicable.
The Testimonial Rule prohibits the use of a testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by the investment adviser in an investment adviser’s advertisement. The term “testimonial” is not defined in the Testimonial Rule, but the Staff has consistently interpreted the term to include a statement of a client’s experience with, or endorsement of, an investment adviser. The Staff has explained the Testimonial Rule prohibits such use because the testimonial may give rise to a fraudulent or deceptive implication, or mistaken inference, that the experience of the person giving the testimonial is typical of the experience of the adviser’s clients. The Staff’s guidance provides a more comprehensive framework to approach an investment adviser’s use of social media and information generated in such medium.2
Publication of Commentary from an Independent Social Media Site
The Staff’s guidance provides that an investment adviser’s publication of an advertisement including public commentary from an independent social media site would not implicate the prohibitions of the Testimonial Rule if:
(i) the social media site containing the commentary is independent of the investment adviser;
(ii) there is no material connection between the social media site and the investment adviser that would call into question the independence of the independent social media site or commentary; and
(iii) the investment adviser publishes all of the unedited comments appearing on the independent social media site regarding the investment adviser.
The Staff’s guidance notes that commentary would not be considered “independent” of an investment adviser if it was directly or indirectly authored by the investment adviser on the independent social media site, whether in its own name, a third-party’s name or an alias, assumed or screen name. In addition, the guidance provides that an adviser would be considered to have a “material connection” with a site or commentary if, for example, the investment adviser (1) compensated a social media user for authoring the commentary, including with any product or service of value or (2) prioritized, removed or edited the commentary.
Sorting of Testimonials
The guidance clarifies that an investment adviser may publish on its website testimonials from an independent social media site in a content-neutral manner, such as by chronological or alphabetical order, which presents positive and negative commentary with equal prominence. An investment adviser site may facilitate a user’s viewing of the commentary by providing a sorting mechanism as long as the investment adviser site does not itself sort the commentary. The investment adviser may publish only the totality of the testimonials from an independent social media site and may not highlight or give prominence to a subset of the testimonials (e.g., favorable testimonials).
Testimonials Including Ratings
The guidance provides that an investment adviser’s publication of testimonials from an independent social media site that includes ratings of public commentary would not be prohibited by the Testimonial Rule so long as the independent social media site is designed to make it equally easy for the public to provide positive or negative commentary about the investment adviser. The ratings system must not be designed to elicit any pre-determined results that could benefit any investment adviser. Furthermore, the guidance provides that the independent social media site and the investment adviser may not provide a subjective analysis of the commentary.
Reference to Independent Social Media Site Commentary on an Investment Adviser’s Non-Social Media Advertisements
An investment adviser could reference in its non-social media advertisements (e.g., newspaper, radio, television) the fact that public commentary regarding the investment adviser may be found on an independent social media site and may include the logo of the independent social media site. The Staff provides the example that an investment adviser could state in its newspaper ad “see us on [independent social media site],” but may not include any testimonials from the independent social media site in the newspaper ad without implicating the Testimonial Rule.
“Friends” or “Contacts” Lists
A list or photograph of “friends” or “contacts” on an investment adviser’s social media site would not be prohibited by the Testimonial Rule if the friends or contacts are not grouped or listed so as to be identified as current or past clients of the investment adviser, but are simply listed as accepted contacts or friends of the investment adviser in the ordinary course. If, however, an investment adviser attempts to create the inference that the contacts or friends have experienced favorable results from the investment adviser’s investment advisory services, the advertisement could be considered to be in violation of Section 206(4) and Rule 206(4)-1.
The guidance provides that a third-party’s creation and operation of unconnected community or fan pages generally would not implicate the Testimonial Rule. The guidance cautions investment advisers against publishing content from or driving user traffic to such sites (including through hyperlinks to such sites), particularly if the site does not meet the material connection and independence conditions describe above.
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If you have any questions, please contact your primary attorney in Seward & Kissel’s Investment Management Group.
1 The Staff clarified in an endnote that “publication”, for purposes of the guidance, refers to any form of real-time broadcasting through social media or the Internet whether by hyperlinking, posting, live-streaming, tweeting, or forwarding or any similar public dissemination, and does not relate to advertisements on non-Internet or non-social media sites, such as paper, television or radio.
2 For example, in the National Examination Risk Alert, Volume II, Issue 1 dated January 4, 2012, the SEC stated, 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”.