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

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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.


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