SEC Staff Issues Guidance on Investment Adviser Advertising and Social Media Commentary

April 08, 2014

Many investment advisers have wanted to benefit from third-party comments about their firms in a social media site, but have been prevented by the so-called “testimonial” rule from using them. The Division of Investment Management (the “Division”) recently released guidance on advisers’ use of social media and their publication of advertisements that feature public commentary about them from independent, third-party social media sites (the “Guidance”). The Guidance, in question-and-answer form, discusses how an adviser’s use of social media commentary may or may not violate the prohibition on testimonials in adviser advertising under the Investment Advisers Act of 1940 (the “Advisers Act”). While the Guidance provides advisers with the opportunity to publish social media commentary without violating the prohibition against testimonials, the Guidance sets forth a number of conditions advisers must meet in order to use this commentary. Advisers likely will have to conduct additional monitoring and adopt new policies and procedures. Advisers must weigh their obligation to comply with these conditions against the benefit of using social media commentary in advertisements.


Section 206(4) of the Advisers Act prohibits an investment adviser from engaging in any actions that the Securities and Exchange Commission (the “SEC”), by rule, defines as fraudulent, deceptive or manipulative. Rule 206(4)-1(a)(1) under the Advisers Act makes it unlawful for an adviser, directly or indirectly, to publish, circulate, or distribute any advertisement that refers, directly or indirectly, to any testimonial of any kind concerning the adviser or concerning any advice, analysis, report or other service rendered by the adviser (the “Testimonial Rule”). While not specifically defined in the rule, the SEC staff has interpreted the term “testimonial” to include a “statement of a client’s experience with, or endorsement of, an investment adviser.”1 The SEC staff has stated that the rule prohibits testimonials in adviser advertising because their use “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.”2 Previously, the SEC staff has stated that an adviser’s publication of an article from an unbiased third party regarding the adviser’s performance is not a testimonial, unless it includes a statement of a client’s experience with, or endorsement of, the adviser.3 Additionally, the SEC staff has stated that an adviser’s advertisement that includes a partial list of the adviser’s clients that does no more than identify certain clients of the adviser is not a testimonial.4

Publication of Third-Party Commentary From Independent Social Media Sites

Unlike previous guidance about non-social media advertisements, under the new Guidance it may be possible for an adviser or investment adviser representative (“IAR”)5 to publish independent social media site6 (a “Site”) commentary in an advertisement that includes statements of a client’s experience with or endorsement of the adviser. “Publication” means hyperlinking or other electronic publication; it does not include hard-copy advertisements. The Guidance states that, while publication of commentary that is an explicit or implicit statement of a client’s experience with or endorsement of the adviser on the adviser’s own social media site would be prohibited under the Testimonial Rule, the adviser’s publication of the same commentary — but from a Site — on its own social media site would not violate the Testimonial Rule. However, the Division states that several criteria must be met before an adviser can publish third party social media commentary:

  • The adviser must not have the ability to affect which public commentary is included or how it is presented on the Site;
  • The commentators’ ability to include public commentary must not be restricted;7 and
  • The Site must allow for the viewing of all public commentary and update of new commentary on a real-time basis.

In addition, in order for publication of commentary from a Site to not violate the Testimonial Rule, the Division states that:

  • The Site must provide content independent of the adviser;
  • The adviser must publish all of the unedited comments appearing on the Site regarding the adviser;8 and
  • The adviser must not highlight or give prominence to a subset of testimonials.9

The Division states that if an adviser drafts or submits commentary included on the Site, is allowed to suppress publication of all or a portion of the commentary, edit the commentary, or is able to organize or prioritize how the commentary is presented, the Testimonial Rule would generally be implicated. Under the Guidance, “content independent of” the adviser means that an adviser does not directly or indirectly write the commentary on a Site, including through a third party’s name or assumed or screen name. Additionally, an adviser would have a “material connection” with a Site if it compensates a social media user for writing commentary or if it prioritized, removed or edited the commentary. Under the Guidance, examples of an adviser’s “material connection” with a Site would include:

  • Having an adviser’s supervised persons submit testimonials about the adviser on a Site and using the testimonials in adviser advertisements; and
  • Compensating a client or prospective client (including with discounts or offers of free services) to post commentary on a Site and then publishing the commentary in an adviser advertisement.

Other Permissible Activities on Sites

The Division also provided guidance on other activities an adviser may engage in related to Sites that would not violate the Testimonial Rule. For example, an adviser:

  • Is not prohibited from advertising itself on a Site from which it has published commentary so long as it is readily apparent to a reader that the adviser’s advertisement is separate from the commentary on the Site and the adviser complies with the material connection and independence factors;
  • May state in non-social media advertisements that commentary regarding the adviser may be found on a Site and may include the Site’s logo on the non-social media advertisement, but testimonials from the Site may not be published in a newspaper advertisement without implicating the Testimonial Rule; and
  • May list contacts or friends on its own social media site so long as contacts or friends are not grouped or listed so as to be identified as current or past clients of the adviser, or to otherwise create an inference that the contacts or friends experienced favorable results from the adviser’s services.


While the Guidance appears to have provided advisers with an opportunity to use public commentary from a Site that may contain testimonials, but would not implicate the Testimonial Rule, this opportunity carries with it a number of conditions that may make additional policies and procedures necessary for an adviser. In particular, the Guidance may require advisers to not only monitor, on an ongoing basis, the relationships they have with third parties who publish Sites, but also to confirm that the third party is operating the Site in accordance with the Guidance’s requirements, e.g., unrestricted content and updates on a real-time basis.

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1 See Cambiar Investors, Inc., SEC Staff No-Action Letter (pub. avail. Aug. 28, 1997).
2 See Richard Silverman, SEC Staff No-Action Letter (pub. avail. March 27, 1985).
3 See New York Investors Group, Inc., SEC Staff No-Action Letter (pub. avail. Sept. 7, 1982); Stalker Advisory Services, SEC Staff No-Action Letter (pub. avail. Feb. 14, 1994). See also Kurtz Capital Management, SEC Staff No-Action Letter (pub. avail. Jan. 22, 1988).
4 See Cambiar, supra n.1. The Division reiterates, however, that an advertisement that contains an article from an unbiased third party or a partial client list may nonetheless violate Section 206(4) of and Rule 206(4)-1(a)(5) under the Advisers Act if it is false and misleading.
5 For the purposes of this Alert, the term “investment adviser” or “adviser” is meant to include an adviser’s IAR.
6 The Division defines independent social media sites as third-party sites that “predominantly host user opinions, beliefs, findings or experiences about service providers, including investment advisory representatives or investment advisers (e.g., Angie’s List).”
7 The Guidance states that Sites that require member or subscription fees would not be considered as restricted. See n.13.
8 The Guidance states that a Site’s editorial policies to edit or remove commentary that violates its own published content guidelines (such as prohibiting defamatory statements, materials that infringe on intellectual property rights, materials that contain viruses, racially offensive statements or profanity) would not be considered as impermissible editing under the conditions of the Guidance. See n.14.
9 Under the Guidance, the adviser can include testimonials that use a mathematical average of commentary provided that commenters themselves rate the adviser based on a ratings system that is not designed to elicit any pre-determined results that could benefit any adviser.

This article was originally published by Bingham McCutchen LLP.